CMP Associates Regulation Blog: Global Growth Standstill Recession, Stalled Job Creation with 30 Million in Job Stress, Falling Real Wages, Stagnant Incomes and International Financial Turbulence

In memoriam

Antonio Castelo Branco Maciel

Global Growth Standstill Recession, Stalled Job Creation with 30 Million in Job Stress, Falling Real Wages, Stagnant Incomes and International Financial Turbulence

Carlos M. Pelaez

Executive Summary

I Stalled Job Creation with 30 Million in Job Stress

II Falling Real Wages

III Stagnant Incomes

IV International Financial Turbulence

V Global Inflation

VI Global Growth Standstill Recession

VIA United States

VIB Japan

VIC China

VID Euro Area

VIE Germany

VIF France

VIG Italy

VIH UK

VII Spain

VII Valuation of Risk Financial Assets

VIII Economic Indicators

IX Interest Rates

X Conclusion

References

Appendix I: The Great Inflation and Unemployment

Executive Summary

The US is in the adverse situation of zero growth in job creation together with annual equivalent growth in the first half of 2011 of 0.7 percent. In IQ2011 the US economy grew at the seasonally-adjusted annual equivalent rate (SAAE) rate of 0.4 percent, which discounts to 0.1 percent per quarter, and in IIQ2011 the US economy grew at the SAAE rate of 1.0 percent, which discounts to 0.25 percent per quarter (http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html). Thus, growth in the first half was 1.035 {[(1.001) x (1.0025) -1]100}, which is equivalent for a full year of two semesters to only 0.7 percent {(1.0035 x 1.0035)-1]100}. In similarity with many other advanced economies, the US economy is in a standstill “growth recession.” The definition of growth recession could be a low growth rate that is insufficient to move the economy to full employment of humans together with their knowledge and skills, productive capacity and natural resources. The risk of a standstill growth recession is that the economy could contract again with nonzero probability that is unknown.

High-frequency data must be interpreted with significant caution. An unfavorable weekly or monthly report may be reversed to favorable in the near future. The employment situation of the US has not improved in the current expansion phase as in past upswing periods of the US business cycle. The main reason for weak job creation is mediocre performance in the current expansion with average GDP growth of only 2.4 percent seasonally-adjusted annual equivalent (SAAE) rate in the expansion from IIIQ2009 to IIQ2011, which is much lower than 6.2 percent SAAE rate on average in the expansion phases of four recessions. In particular, the average SAAE growth rate in the expansion from IQ1983 to IVQ1985 was 5.7 percent.

Chart 1, anticipated here from the text, shows US real quarterly GDP growth from 1980 to 1989. The economy contracted during the recession and then expanded vigorously throughout the 1980s, rapidly eliminating the unemployment caused by the contraction.

Chart 3, US, Real GDP, 1980-1989

Source: http://www.bea.gov/iTable/index_nipa.cfm

Chart 2 shows the entirely different situation of the real quarterly GDP in the US between 2007 and 2011. The economy has underperformed during the first eight quarters of expansion for the first time in the comparable contractions since the 1950s. The US economy is in a perilous standstill.

Chart 4, US, Real GDP, 2007-2011

Source: http://www.bea.gov/iTable/index_nipa.cfm

The Bureau of Labor Statistics (BLS) of the US Department of Labor provides the monthly employment situation report. This report consists of data on the US labor markets based on two types of samples: (1) the payroll survey; and (2) the household survey. There is no favorable information in the report for Aug. The first four rows in Table 1, anticipated here from the text, summarize the data in the payroll report. Growth of total nonfarm payroll jobs from Jul to Aug seasonally adjusted (SA) was 0, similar to the fed funds rate of 0 to ¼ percent and to the growth of GDP of 0.7 percent annual rate. The US has exchanged its AAA rating for 000 economic performance. Growth of nonfarm payroll jobs in Jul was 85,000, which does not absorb the new entrants in the labor force and leaves virtually unaltered the number of 30 million people in job stress. Job creation in the US is through increases in private-sector payrolls, which grew by only 17,000 in Aug and 156,000 in Jul, without alleviating job stress. The unemployment rate calculated with the data of the household survey remains at 9.1 percent in Aug, which is much higher than the “natural rate of unemployment” of around 5.2 percent.

Table 1, Summary of the Employment Situation Report SA

	Aug	Jul
New Nonfarm Payroll Jobs	0	85,000
New Private Payroll Jobs	17,000	156,000
Average Hourly Earnings	$23.09	$23.12
Average Weekly Hours	34.2	$34.3
Unemployment Rate Household Survey % of Labor Force	9.1	9.1
Number Unemployed and Underemployed Blog Calculation	29.9 million NSA	29.6 million NSA

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

The results of calculations in the text in Table 3 are that: (1) there are an estimated 4.451 million unemployed who are not counted because they left the labor force on their belief they could not find another job; (2) the total number of unemployed is effectively 18.459 million and not 14.008 million of whom many have been unemployed long term; (3) the rate of unemployment is 11.6 percent and not 9.1 percent, not seasonally adjusted, or 9.1 percent seasonally adjusted; and (4) the number of people in job stress is 29.887 million by adding the 4.451 million leaving the labor force because they believe they could not find another job, 8.738 million who work part-time because they cannot find full-time employment and 2.680 who are marginally attached to the labor force (18.459 + 8.738 + 2.680). The employment to population ratio dropped from 62.9 percent on average in 2006 to 58.8 percent in Aug 2010, 58.6 percent in Jul 2011 and 58.5 percent in Aug 2011 and the number of employed dropped from 144 million to 140 million. What really matters for labor input in production and wellbeing is the number of people with jobs or the employment/population ratio, which has declined and does not show signs of increasing. There are almost four million fewer people working in 2011 than in 2006 and the number employed is not increasing. The number of hiring relative to the number unemployed measures the chances of becoming employed. The number of hiring in the US economy has declined by 17 million and does not show signs of increasing (http://cmpassocregulationblog.blogspot.com/2011/03/slow-growth-inflation-unemployment-and.html see section IV Hiring Collapse in http://cmpassocregulationblog.blogspot.com/2011/08/world-financial-turbulence-global.html http://cmpassocregulationblog.blogspot.com/2011/06/increasing-risk-aversion-analysis-of.html).

The wage bill is the average weekly hours times the earnings per hour. Earnings per hour fell from $23.12 in Jul 2011 to $23.09 in Aug 2011 and average weekly earnings declined from $793.02 in Jul 2011 to $789.68 in Aug, 2011. The number of average weekly hours did not change from 34.2 in Aug 2010 to 34.2 in Aug 2011. The wage bill before taxes rose by 1.9 percent (1.019 times 1.000). The wage bill rose 2.6 percent in the 12 months ending in Jul, 2011 {[(wage bill in Jul 2011)/(wage bill in Jul 2010)-1 = ($23.12x34.3)/($22.61x34.2)-1]100} while CPI inflation was 3.6 percent in the 12 months ending in Jul 2011 for an inflation-adjusted wage-bill decline of 1.0 percent {[(1.026/1.036)-1]100}. Energy and food price increases are similar to a “silent tax” that is highly regressive, harming the most those with lowest incomes. There are concerns that the wage bill would deteriorate in purchasing power because of the raw materials shock in the form of increases in prices of commodities such as the 31.1 percent steady increase in the DJ-UBS Commodity Index from Jul 2, 2010 to Sep 2, 2011. The charts of four commodity price indexes by Bloomberg show steady increase since Jul 2, 2010 that was interrupted briefly only in Nov with the sovereign issues in Europe triggered by Ireland, in Mar by the earthquake and tsunami in Japan and in the beginning of May by the decline in oil prices and the sovereign risk difficulties in Europe (http://www.bloomberg.com/markets/commodities/futures/).

Inflation-adjusted average hourly earnings have been decreasing by 1.4 percent in Apr, 1.6 percent in May, 1.6 percent in Jun and 1.3 percent in Jul. A fractured labor market with falling numbers of hiring does not offer opportunities for wage and salary improvements.

The report on personal income and outlays shows reduction in the rates of growth of real or inflation-adjusted disposable income (deducting taxes) from 2.0 percent annual equivalent in IVQ2010 to 0.7 percent AE in Jan-Jul 2011 and of growth of real or inflation-adjusted personal consumption expenditures from 3.2 percent annual equivalent in IVQ2010 to 1.7 percent annual equivalent in Jan-Jul 2011. There is no evidence of trend but rather the appearance of a slowing rate of growth that is captured by GDP growth of 0.4 percent annual equivalent in IQ2011 and1.0 percent annual equivalent in IIQ2011, which accumulates to 0.35 percent in the first half of 2011 that is equivalent to 0.7 percent if repeated during two semesters for an entire year, and economic indicators in IIQ2011 and now also for Jul and Aug. There may have been a slowdown because of the interruption of the supply chain by the earthquake in Japan and sovereign turbulence in Europe but the economy was already weak before these events as shown by virtually flat real disposable income, growing at 0.7 percent annual equivalent in the first half of 2011. The 12-month rates of increase of real disposable income and real personal consumptions expenditures in the past eight months show a trend of deterioration of real disposable income from over 3 percent in the final four months of 2010 to less than 3 percent in IQ2011 and then collapsing to a range of 1.2 to 1.4 percent in May-Jul. Real personal consumption expenditure growth decelerated less sharply from close to 3 percent in IVQ 2010 to 2.3 percent in Jul and 2.0 percent in Jun.

Section VI Global Growth Standstill Recession provides the regional and country data tables for economies that contribute some three quarters of world economic output. The purchasing managers’ indexes for the US by the Institute for Supply Management and for the world by Markit show deceleration of growth commonly to conditions in 2009, weak internal demand and rapidly deteriorating export business. High-frequency indicators with a lag concur with the more current purchasing managers’ indexes.

High volatility has become the norm in financial markets. Real Time Economics published in the Wall Street Journal on Sep 3 an article on “Number of the Week: Volatile August for Stocks” (http://blogs.wsj.com/economics/2011/09/03/number-of-the-week-volatile-august-for-stocks/). According to Real Time Economics, the daily change in the Dow Jones Industrial Average (DJIA) in the month of Aug was 1.9 percent, which does not compare with 2008, but it is still the tenth most volatile month in the past 75 years. Weak economic performance and a fractured job market are coexisting with uncertainty reflected in highly volatile valuations of risk financial assets.

I Stalled Job Creation with 30 Million in Job Stress. The US is in the adverse situation of zero growth in job creation together with annual equivalent growth in the first half of 2011 of 0.7 percent. In IQ2011 the US economy grew at the seasonally-adjusted annual equivalent rate (SAAE) rate of 0.4 percent, which discounts to 0.1 percent per quarter, and in IIQ2011 the US economy grew at the SAAE rate of 1.0 percent, which discounts to 0.25 percent per quarter (http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html). Thus, growth in the first half was 1.035 {[(1.001) x (1.0025) -1]100}, which is equivalent for a full year of two semesters to only 0.7 percent {(1.0035 x 1.0035)-1]100}. In similarity with many other advanced economies, the US economy is in a standstill “growth recession.” The definition of growth recession could be a low growth rate that is insufficient to move the economy to full employment of humans together with their knowledge and skills, productive capacity and natural resources. The risk of a standstill growth recession is that the economy could contract again with nonzero probability that is unknown.

Chart 1 shows US real quarterly GDP growth from 1980 to 1989. The economy contracted during the recession and then expanded vigorously throughout the 1980s, rapidly eliminating the unemployment caused by the contraction.

Chart 3, US, Real GDP, 1980-1989

Source: http://www.bea.gov/iTable/index_nipa.cfm

Chart 4, US, Real GDP, 2007-2011

Source: http://www.bea.gov/iTable/index_nipa.cfm

The Bureau of Labor Statistics (BLS) of the US Department of Labor provides the monthly employment situation report. This report consists of data on the US labor markets based on two types of samples: (1) the payroll survey; and (2) the household survey. There is no favorable information in the report for Aug. The first four rows in Table 1 summarize the data in the payroll report. Growth of total nonfarm payroll jobs from Jul to Aug seasonally adjusted (SA) was 0, similar to the fed funds rate of 0 to ¼ percent and to the growth of GDP of 0.7 percent annual rate. Growth of nonfarm payroll jobs in Jul was 85,000, which does not absorb the new entrants in the labor force and leaves virtually unaltered the number of 30 million people in job stress. Job creation in the US is through increases in private-sector payrolls, which grew by only 17,000 in Aug and 156,000 in Jul, without alleviating job stress. The unemployment rate calculated with the data of the household survey remains at 9.1 percent in Aug, which is much higher than the “natural rate of unemployment” of around 5.2 percent. The remainder of this section analyzes the employment situation report.

Table 1, Summary of the Employment Situation Report SA

	Aug	Jul
New Nonfarm Payroll Jobs	0	85,000
New Private Payroll Jobs	17,000	156,000
Average Hourly Earnings	$23.09	$23.12
Average Weekly Hours	34.2	$34.3
Unemployment Rate Household Survey % of Labor Force	9.1	9.1
Number Unemployed and Underemployed Blog Calculation	29.9 million NSA	29.6 million NSA

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

The Bureau of Labor Statistics (BLS) released the employment situation report on Fri Sep 2 showing an unchanged seasonally adjusted rate of unemployment, or unemployed as percent of the labor force, of 9.1 percent in Aug 2011, which is identical to 9.1 percent in Jul 2011 (http://www.bls.gov/news.release/pdf/empsit.pdf). The number of people in job stress unemployed or underemployed in Table 2 is 25.4 million in Aug, compared with 25.1 million in Jul and 25.3 million in Jun. The number in job stress unemployed or underemployed of 25.4 million in Aug is composed of 13.9 million unemployed (of whom 6.0 million, or 43.2 percent, unemployed for 27 weeks or more) compared with 13.9 million unemployed in Jul (of whom 6.2 million, or 44.4 percent, unemployed for 27 weeks or more), 8.8 million employed part-time for economic reasons (who suffered reductions in their work hours or could not find full-time employment) compared with 8.4 million in Jul and 2.6 million who were marginally attached to the labor force in Aug (who were not in the labor force but wanted and were available for work) compared with 2.8 million in Jul.

Table 2, People in Job Stress, Millions and % SA

	Aug	Jul	Jun
Unemployed Millions	13.967	13.931	14.087
Unemployed ≥27 weeks Millions	6.034	6.185	6.289
Unemployed ≥27 weeks %	43.2	44.4	44.6
Part Time Economic Reasons Millions	8.826	8.396	8.552
Marginally Attached to Labor Force Millions	2.575	2.785	2.680
Job Stress Millions	25.368	25.112	25.319
Unemploy- ment Rate	9.1	9.1	9.2

Job Stress = Unemployed + Part Time Economic Reasons + Marginally Attached Labor Force

Source:

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

http://www.bls.gov/news.release/archives/empsit_05062011.pdf

http://www.bls.gov/news.release/archives/empsit_04012011.pdf

In an article in the Financial Times, Martin Feldstein (2011Jul25) finds that the true issue in the US is jobs. The problem is the fractured labor market. Feldstein (2011Jul25) calculates 29 million Americans who are unable to find the job they desire. Comments in this blog have been providing a calculation of unemployed or underemployed in the US of around 29 million. Additional information provides deeper insight on the fractured job market of the US. Table 3 consists of data and additional calculations using the BLS household survey, illustrating the possibility that the actual rate of unemployment could be 11.6 percent and the number of people in job stress could be closer to 30 million. The first column provides for 2006 the yearly average population (POP), labor force (LF), participation rate or labor force as percent of population (PART %), employment (EMP), employment population ratio (EMP/POP %), unemployment (UEM), the unemployment rate as percent of labor force (UEM/LF Rate %) and the number of people not in the labor force (NLF). The numbers in column 2006 are averages in millions while the monthly numbers for Aug 2010 and Aug and Jul 2011 are in thousands, not seasonally adjusted. The average yearly participation rate of the population in the labor force was in the range of 62.0 percent minimum to 67.1 percent maximum between 2000 and 2006 with the average of 66.4 percent (ftp://ftp.bls.gov/pub/special.requests/lf/aa2006/pdf/cpsaat1.pdf). The objective of Table 3 is to assess how many people could have left the labor force because they do not think they can find another job. Row “LF PART 66.2 %” applies the participation rate of 2006, almost equal to the rates for 2000 to 2006, to the population in Aug 2010 and Aug and Jul 2011 to obtain what would be the labor force of the US if the participation rate had not changed. In fact, the participation rate fell to 65.0 percent by Aug 2010 and was 64.6 percent in Jul 2011 and 64.3 percent in Aug 2011, suggesting that many people simply gave up on finding another job. Row “∆ NLF UEM” calculates the number of people not counted in the labor force because they could have given up on finding another job by subtracting from the labor force with participation rate of 66.2 percent (row “LF PART 66.2%”) the labor force estimated in the household survey (row “LF”). Total unemployed (row “Total UEM”) is obtained by adding unemployed in row “∆NLF UEM” to the unemployed of the household survey in row “UEM.” The row “Total UEM%” is the effective total unemployed “Total UEM” as percent of the effective labor force in row “LF PART 66.2%.” The results are that: (1) there are an estimated 4.451 million unemployed who are not counted because they left the labor force on their belief they could not find another job (∆NLF UEM); (2) the total number of unemployed is effectively 18.459 million (Total UEM) and not 14.008 million (UEM) of whom many have been unemployed long term; (3) the rate of unemployment is 11.6 percent (Total UEM%) and not 9.1 percent, not seasonally adjusted, or 9.1 percent seasonally adjusted; and (4) the number of people in job stress is close to 30 million by adding the 4.451 million leaving the labor force because they believe they could not find another job. The last row of Table 3 provides the number of people in job stress (“In Job Stress) not seasonally adjusted at 29.877 million in Aug 2011, adding the total number of unemployed (“Total UEM”), plus those involuntarily in part-time jobs because they cannot find anything else (“Part Time Economic Reasons”) and the marginally attached to the labor force (“Marginally attached to LF”). The employment population ratio “EMP/POP %” dropped from 62.9 percent on average in 2006 to 58.8 percent in Aug 2010, 58.6 percent in Jul 2011 and 58.5 percent in Aug 2011 and the number of employed (EMP) dropped from 144 million to 140 million. What really matters for labor input in production and wellbeing is the number of people with jobs or the employment/population ratio, which has declined and does not show signs of increasing. There are almost four million fewer people working in 2011 than in 2006 and the number employed is not increasing. The number of hiring relative to the number unemployed measures the chances of becoming employed. The number of hiring in the US economy has declined by 17 million and does not show signs of increasing (http://cmpassocregulationblog.blogspot.com/2011/03/slow-growth-inflation-unemployment-and.html see section IV Hiring Collapse in http://cmpassocregulationblog.blogspot.com/2011/08/world-financial-turbulence-global.html http://cmpassocregulationblog.blogspot.com/2011/06/increasing-risk-aversion-analysis-of.html).

Table 3, Population, Labor Force and Unemployment, NSA

	2006	Aug 2010	Jul 2011	Aug 2011
POP	229	238,099	239,671	239,871
LF	151	154,678	154,812	154,344
PART%	66.2	65.0	64.6	64.3
EMP	144	139,919	140,384	140,335
EMP/POP%	62.9	58.8	58.6	58.5
UEM	7	14,759	14,428	14,008
UEM/LF Rate%	4.6	9.5	9.3	9.1
NLF	77	83,421	84,859	85,528
LF PART 66.2%		157,622	158,662	158,795
∆NLF UEM		2,944	3,850	4,451
Total UEM		17,703	18,278	18,459
Total UEM%		11.2	11.5	11.6
Part Time Economic Reasons		8,737	8,514	8,738
Marginally Attached to LF		2,622	2,785	2,680
In Job Stress		29,062	29,577	29,877

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

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

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

Sources:

ftp://ftp.bls.gov/pub/special.requests/lf/aa2006/pdf/cpsaat1.pdf

http://www.bls.gov/news.release/archives/empsit_12032010.pdf

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

Total nonfarm payroll employment seasonally adjusted (SA) rose by 0 in Aug and private payroll employment rose by 17,000. Table 4 provides the monthly change in jobs seasonally adjusted in the prior strong contraction of 1981-1982 and the recovery in 1983 into 1984 and in the contraction of 2008-2009 and in the recovery in 2009 to 2011. All revisions have been incorporated in Table 4. The data in the recovery periods are in relief to facilitate comparison. There is significant bias in the comparison. The average yearly civilian noninstitutional population was 174.2 million in 1983 and the civilian labor force 111.6 million, growing by 2009 to an average yearly civilian noninstitutional population of 235.8 million and civilian labor force of 154.1 million, that is, increasing by 35.4 percent and 38.1 percent, respectively (http://www.bls.gov/cps/cpsaat1.pdf). Total nonfarm payroll jobs in 1983 were 90.280 million, jumping to 94.530 million in 1984 while total nonfarm jobs in 2010 were 129.818 million declining from 130.807 million in 2009 (http://www.bls.gov/webapps/legacy/cesbtab1.htm ). What is striking about the data in Table 4 is that the numbers of monthly increases in jobs in 1983 are several times higher than in 2010 to 2011 even with population higher by 35.4 percent and labor force higher by 38.1 percent in 2009 relative to 1983 nearly three decades ago and total number of jobs in payrolls rose by 39.5 million in 2010 relative to 1983 or by 43.8 percent.. Growth has been mediocre in the six quarters of expansion beginning in IIIQ2009 in comparison with earlier expansions (http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/06/financial-risk-aversion-slow-growth.html http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/05/mediocre-growth-world-inflation.html http://cmpassocregulationblog.blogspot.com/2011/03/slow-growth-inflation-unemployment-and.html http://cmpassocregulationblog.blogspot.com/2011/02/mediocre-growth-raw-materials-shock-and.html) and also in terms of what is required to reduce the job stress of at least 25 million persons but likely close to 30 million. Some of the job growth and contraction in 2010 in Table 4 is caused by the hiring and subsequent layoff of temporary workers for the 2010 census.

Table 4, Monthly Change in Jobs, Number SA

Month	1981	1982	1983	2008	2009	2010	Private
Jan	95	-327	225	13	-820	-39	-42
Feb	67	-6	-78	-83	-726	-35	-21
Mar	104	-129	173	-72	-796	192	144
Apr	74	-281	276	-185	-660	277	229
May	10	-45	277	-233	-386	458	48
Jun	196	-243	378	-178	-502	-192	65
Jul	112	-343	418	-231	-300	-49	93
Aug	-36	-158	-308	-267	-231	-59	110
Sep	-87	-181	1114	-434	-236	-29	109
Oct	-100	-277	271	-509	-221	171	143
Nov	-209	124	352	-802	-55	93	128
Dec	-278	-14	356	-619	-130	152	167
			1984			2011	Private
Jan			447			68	94
Feb			479			235	261
Mar			275			194	219
Apr			363			217	241
May			308			53	99
Jun			379			46	80
Jul			312			85	156
Aug			241			0	17
Sep			311
Oct			286
Nov			349
Dec			127

Source: http://data.bls.gov/PDQ/servlet/SurveyOutputServlet

http://www.bls.gov/webapps/legacy/cesbtab1.htm

http://www.bls.gov/schedule/archives/empsit_nr.htm#2010

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

Important aspects of growth of payroll jobs from Aug 2010 to Aug 2011, not seasonally adjusted (NSA), are provided in Table 5. Total nonfarm employment increased by 1,282,000, consisting of growth of total private employment by 1,744,000 and decline by 462,000 of government employment. Monthly average growth of private payroll employment has been 145,333, which is mediocre relative to 25 to 30 million in job stress, while total nonfarm employment has grown on average by only 106,833 per month. Manufacturing employment increased by 211,000 while private service providing employment grew by 1,428,000. An important feature is that jobs in temporary help services increased by 142,000. This episode of jobless recovery is characterized by part-time jobs. An important characteristic is that the losses of government jobs have been high in local government, 294,000 jobs lost, because of the higher number of employees in local government, 13.2 million relative to 4.8 million in state jobs and 2.8 million in federal jobs.

Table 5, Employees in Nonfarm Payrolls Not Seasonally Adjusted in Thousands

	Aug 2010	Aug 2011	Change
A Total Nonfarm	129,624	130,906	1,282
B Total Private	108,396	110,140	1,744
B1 Goods Producing	18,204	18,520	316
B1a Manu-facturing	11,646	11,857	211
B2 Private service providing	90,192	91,620	1,428
B2a Temporary help services	2,129	2,271	142
C Government	21,228	20,766	-462
C1 Federal	2,949	2,839	-110
C2 State	4,856	4,798	-58
C3 Local	13,423	13,129	-294

Note: A = B+C, B = B1 + B2, C=C1 + C2 + C3

Source:

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

The NBER dates recessions in the US from peaks to troughs as: IQ80 to IIIQ80, IIIQ81 to IV82 and IVQ07 to IIQ09 (http://www.nber.org/cycles/cyclesmain.html). Table 6 provides total annual level nonfarm employment in the US for the 1980s and the 2000s, which is different from 12 months comparisons. Nonfarm jobs rose by 4.853 million in 1982 to 1984, or 5.4 percent, and continued rapid growth in the rest of the decade. In contrast, nonfarm jobs are down by 7.780 million in 2010 relative to 2007 and fell by 989,000 in 2010 relative to 2009 even after six quarters of GDP growth. Monetary and fiscal stimuli have failed in increasing growth to rates required for mitigating job stress. The initial growth impulse reflects a flatter growth curve in the current expansion.

Table 6, Total Nonfarm Employment in Thousands

Year	Total Nonfarm	Year	Total Nonfarm
1980	90,528	2000	131,785
1981	91,289	2001	131,826
1982	89,677	2002	130,341
1983	90,280	2003	129,999
1984	94,530	2004	131,435
1985	97,511	2005	133,703
1986	99,474	2006	136,086
1987	102,088	2007	137,598
1988	105,345	2008	136,790
1989	108,014	2009	130,807
1990	109,487	2010	129,818

Source: http://www.bls.gov/webapps/legacy/cesbtab1.htm

The highest average yearly percentage of unemployed to the labor force since 1940 was 14.6 percent in 1940 followed by 9.9 percent in 1941, 8.5 percent in 1975, 9.7 percent in 1982 and 9.6 percent in 1983 (ftp://ftp.bls.gov/pub/special.requests/lf/aa2006/pdf/cpsaat1.pdf). The rate of unemployment remained at high levels in the 1930s, rising from 3.2 percent in 1929 to 22.9 percent in 1932 in one estimate and 23.6 percent in another with real wages increasing by 16.4 percent (Margo 1993, 43; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 214-5). There are alternative estimates of 17.2 percent or 9.5 percent for 1940 with real wages increasing by 44 percent. Employment declined sharply during the 1930s. The number of hours worked remained 29 percent in 1939 below the level of 1929 (Cole and Ohanian 1999). Private hours worked fell in 1939 to 25 percent of the level in 1929. The policy of encouraging collusion through the National Industrial Recovery Act (NIRA), to maintain high prices, together with the National Labor Relations Act (NLRA), to maintain high wages, prevented the US economy from recovering employment levels until Roosevelt abandoned these policies toward the end of the 1930s (for review of the literature analyzing the Great Depression see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 198-217).

The Bureau of Labor Statistics (BLS) makes yearly revisions of its establishment survey (Harris 2011BA):

“With the release of data for January 2011, the Bureau of Labor Statistics (BLS) introduced its annual revision of national estimates of employment, hours, and earnings from the Current Employment Statistics (CES) monthly survey of nonfarm establishments. Each year, the CES survey realigns its sample-based estimates to incorporate universe counts of employment—a process known as benchmarking. Comprehensive counts of employment, or benchmarks, are derived primarily from unemployment insurance (UI) tax reports that nearly all employers are required to file with State Workforce Agencies.”

The number of not seasonally adjusted total private jobs in the US in Dec 2010 is 108.464 million, declining to 106.079 million in Jan 2011, or by 2.385 million, because of the adjustment of a different benchmark and not actual job losses. The not seasonally adjusted number of total private jobs in Dec 1984 is 80.250 million, declining to 78.704 million in Jan 1985, or by 1.546 million for the similar adjustment. Table 7 attempts to measure job losses and gains in the recessions and expansions of 1981-1985 and 2007-2011. The final ten rows provide job creation from May 1983 to May 1984 and from May 2010 to May 2011, that is, at equivalent stages of the recovery from two comparable strong recessions. The row “Change ∆%” for May 1983 to May 1984 shows an increase of total nonfarm jobs by 4.9 percent and of 5.9 percent for total private jobs. The row “Change ∆%” for May 2010 to May 2011 shows an increase of total nonfarm jobs by 0.7 percent and of 1.7 percent for total private jobs. The last two rows of Table 11 provide a calculation of the number of jobs that would have been created from May 2010 to May 2011 if the rate of job creation had been the same as from May 1983 to May 1984. If total nonfarm jobs had grown between May 2010 and May 2011 by 4.9 percent, as between May 1983 and May 1984, 6.409 million jobs would have been created in the past 12 months for a difference of 5.457 million more total nonfarm jobs relative to 0.952 million jobs actually created. If total private jobs had grown between May 2010 and May 2011 by 5.9 percent as between May 1983 and May 1984, 6.337 million private jobs would have been created for a difference of 4.539 million more total private jobs relative to 1.798 million jobs actually created.

Table 7, Total Nonfarm and Total Private Jobs Destroyed and Subsequently Created in Two Recessions IIIQ1981-IVQ1982 and IVQ2007-IIQ2009, Thousands and Percent

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

*[(130,801x1.049)-130,801] = 6,409 thousand

**[(107,405)x1.059 – 107,405] = 6,337 thousand

Source: http://data.bls.gov/pdq/SurveyOutputServlet

II Falling Real Wages. The wage bill is the average weekly hours times the earnings per hour. Table 8 provides the estimates by the BLS of earnings per hour seasonally adjusted, increasing from $22.67/hour in Aug 2010 to $23.09/hour in Aug 2011, or by 1.9 percent. There is disappointment in financial markets about the pace of wage increases because of rising food and energy costs that inhibit consumption and thus sales. Average private weekly earnings increased slightly by $14.37 from $775.31 in Aug 2010 to $789.68 in Aug 2011 or by 1.9 percent. Earnings per hour fell from $23.12 in Jul 2011 to $23.09 in Aug 2011 and average weekly earnings declined from $793.02 in Jul 2011 to $789.68 in Aug, 2011. The number of average weekly hours did not change from 34.2 in Aug 2010 to 34.2 in Aug 2011. The wage bill before taxes rose by 1.9 percent (1.019 times 1.000). The wage bill rose 2.6 percent in the 12 months ending in Jul, 2011 {[(wage bill in Jul 2011)/(wage bill in Jul 2010)-1 = ($23.12x34.3)/($22.61x34.2)-1]100} while CPI inflation was 3.6 percent in the 12 months ending in Jul 2011 for an inflation-adjusted wage-bill decline of 1.0 percent {[(1.026/1.036)-1]100}. Energy and food price increases are similar to a “silent tax” that is highly regressive, harming the most those with lowest incomes. There are concerns that the wage bill would deteriorate in purchasing power because of the raw materials shock in the form of increases in prices of commodities such as the 31.1 percent steady increase in the DJ-UBS Commodity Index from Jul 2, 2010 to Sep 2, 2011. The charts of four commodity price indexes by Bloomberg show steady increase since Jul 2, 2010 that was interrupted briefly only in Nov with the sovereign issues in Europe triggered by Ireland, in Mar by the earthquake and tsunami in Japan and in the beginning of May by the decline in oil prices and the sovereign risk difficulties in Europe (http://www.bloomberg.com/markets/commodities/futures/).

Table 8, Earnings per Hour and Average Weekly Hours SA

Earnings per Hour	Aug 2010	Jun 2011	Jul 2011	Aug 2011
Total Private	$22.67	$23.01	$23.12	$23.09
Goods Producing	$24.14	$24.39	$24.46	$24.46
Service Providing	$22.32	$22.69	$22.81	$22.76
Average Weekly Earnings
Total Private	$775.31	$789.24	$793.02	$789.68
Goods Producing	$958.36	$973.16	$973.51	$973.51
Service Providing	$738.79	$753.31	$759.57	$753.36
Average Weekly Hours
Total Private	34.2	34.3	34.3	34.2
Goods Producing	39.7	39.9	39.8	39.8
Service Providing	33.1	33.2	33.3	33.1

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

Average hourly earnings in the first eight months of 2007, 2010 and 2011 are shown in Table 9 together with their 12-months percentage change, CPI 12 month inflation and 12-month percentage changes in CPI inflation-adjusted average hourly earnings. Nominal changes of hourly earnings in 2007 were high and compensated for CPI inflation as shown by positive changes in 12 months real or CPI inflation-adjusted average hourly earnings. In 2010 and 2011, real average hourly earnings have been falling with acceleration in Mar 2011 because of the high headline CPI inflation of 2.7 percent, accelerating in Apr to 3.2 percent and in May, Jun and Jul to 3.6 percent. Headline CPI inflation in the first six months of 2011 accumulated to an annual equivalent 3.7 percent. CPI inflation excluding food and energy accumulated to annual equivalent 2.6 percent in the first six months of 2011. As shown in Table 9, inflation-adjusted average hourly earnings have been decreasing by 1.4 percent in Apr, 1.6 percent in May, 1.6 percent in Jun and 1.3 percent in Jul. A fractured labor market with falling numbers of hiring does not offer opportunities for wage and salary improvements.

Table 9, Average Hourly Earnings Nominal and Inflation Adjusted, Dollars and % NSA

	AHE ALL	12 Month Nominal ∆%	∆% 12 Month CPI	12 Month Real ∆%
2007
Jan*	$20.70*	4.2*	2.1	2.1*
Feb*	$20.79*	4.1*	2.4	1.7*
Mar	$20.78	3.6	2.8	0.8
Apr	$20.85	3.5	2.6	0.7
May	$20.89	3.8	2.7	1.1
Jun	$21.00	3.8	2.7	1.1
Jul	$21.04	3.7	2.4	1.3
Aug	$21.03	3.5	1.9	1.6
2010
Jan	$22.44	1.9	2.6	-0.7
Feb	$22.48	1.9	2.1	-0.2
Mar	$22.48	1.8	2.3	-0.5
Apr	$22.52	1.8	2.2	-0.4
May	$22.57	1.9	2.0	-0.1
Jun	$22.57	1.8	1.1	0.7
Jul	$22.61	1.8	1.2	0.6
Aug	$22.67	1.8	1.1	0.7
2011
Jan	$22.86	1.9	1.6	0.3
Feb	$22.88	1.8	2.1	-0.3
Mar	$22.89	1.8	2.7	-0.9
Apr	$22.93	1.8	3.2	-1.4
May	$23.02	1.9	3.6	-1.6
Jun	$23.01	1.9	3.6	-1.6
Jul	$23.12	2.3	3.6	-1.3
Aug	$23.09	1.8

Note: AHE ALL: average hourly earnings of all employees; CPI: consumer price index; Real: adjusted by CPI inflation; NA: not available

*AHE of production and nonsupervisory employees because of unavailability of data for all employees

Source: http://data.bls.gov/cgi-bin/surveymost?bls

ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

III Stagnant Incomes. The data on personal income and consumption have been revised back to 2003 as it the case of the national accounts (GDP revisions are covered in http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html). All revisions are incorporated in this subsection. There are two types of very valuable information on income, consumption and prices in Table 10, showing monthly, and annual equivalent percentage changes, seasonally adjusted, of current dollar or nominal personal income (NPI), current dollars or nominal disposable personal income (NDPI), real or constant chained (2005) dollars DPI (RDPI), current dollars nominal personal consumption expenditures (NPCE) and constant or chained (2005) dollars PCE. First, the difference between NDPI and RDPI (NDPI/RDPI) and NPCE and RPCE (NPCE/RPCE) indicates inflation. Let the rate of inflation be π, the percentage change in nominal value NV and the change in real value rv. Then:

(1+π)(1+rv) = (1+NV) (1)

Thus, if we know (1+NV) and (1+rv), simple rearrangement provides (1+π):

(1+π) = (1+NV)/(1+rv) (2)

The growing gap between NDPI/RDPI and NPCE/RPCE is inflation and accelerating from the final quarter of 2010 to the first seven months of 2011 but a declining rate since the drop in commodity prices beginning in May. The gap becomes more evident in the cumulative percentages Jan-Jul 2011 and IVQ2010 and their annual equivalents Jan-Jul 2011 AE and IVQ2010 AE. The gap of NDPI/RDPI in Jan-Jul 2011 in Table 10 is 2.4 percent (1.031/1.007), which is much higher than in IVQ2010 of 2.5 percent (1.045/1.02). The gap NPCE/RPCE in Jan-Jun 2011 in Table 10 is 3.1 percent (1.039/1.008), which is much higher than 2.5 percent (1.045/1.02) in IVQ2010. Inflation in the deflator of personal income and outlays is moving toward 3 percent per year. That is, the government is benefitting from a tax known as the inflation tax. By issuing money through its central bank the government buys goods and services. In a situation of sizeable deficits and inflation, the government gains by purchasing before effects of issuing money that causes increases in prices (see http://cmpassocregulationblog.blogspot.com/2011/05/global-inflation-seigniorage-monetary.html http://cmpassocregulationblog.blogspot.com/2011/05/global-inflation-seigniorage-financial.html Pelaez and Pelaez, International Financial Architecture (2005), 201-12). This is a hidden but actually felt contribution of monetary accommodation to financing bloated government expenditures. The new inflation tax argument is not by increases in inflation resulting from increasing monetary aggregates but by the rise in valuations of assets such as commodities induced through the carry trade of near zero interest rates.

Table 10, Percentage Change from Prior Month Seasonally Adjusted of Personal Income, Disposable Income and Personal Consumption Expenditures %

	NPI	NDPI	RDPI	NPCE	RPCE
2011
Jul	0.3	0.3	-0.1	0.8	0.5
Jun	0.2	0.2	0.3	-0.1	0.0
May	0.3	0.2	0.1	0.1	0.0
Apr	0.4	0.4	0.1	0.2	-0.1
Mar	0.5	0.4	0.0	0.6	0.2
Feb	0.6	0.1	0.1	0.8	0.4
Jan	1.2	0.2	0.0	0.4	0.0
Jan- Jul 2011	3.6	1.8	0.4	2.8	1.0
Jan- Jul 2011 A	6.2	3.1	0.7	4.9	1.7
2010
Dec	0.5	0.5	0.2	0.4	0.1
Nov	0.1	0.1	0.0	0.4	0.3
Oct	0.5	0.5	0.3	0.6	0.4
IVQ10	1.1	1.1	0.5	1.4	0.8
IVQ010 A	4.5	4.5	2.0	5.7	3.2

Notes: NPI: current dollars personal income; NDPI: current dollars disposable personal income; RDPI: chained (2005) dollars DPI; NPCE: current dollars personal consumption expenditures; RPCE: chained (2005) dollars PCE; A: annual equivalent; IVQ2010: fourth quarter 2010; A: annual equivalent

Percentage change month to month seasonally adjusted

Source: http://www.bea.gov/newsreleases/national/pi/2011/pdf/pi0711.pdf

Second, while division in quarters is arbitrary, Table 10 shows reduction in the rates of growth of RDPI from 2.0 percent AE in IVQ2010 to 0.7 percent AE in Jan-Jul 2011 and of growth of RPCE from 3.2 percent AE in IVQ2010 to 1.7 percent AE in Jan-Jul 2011. There is no evidence of trend but rather the appearance of a slowing rate of growth that is captured by GDP growth of 0.4 percent annual equivalent in IQ2011 and1.0 percent annual equivalent in IIQ2011, which is equivalent to 0.35 percent in the first half of 2011 that is equivalent to 0.7 percent if repeated during two semesters for an entire year, and economic indicators in IIQ2011 and now also for Jul and Aug. There may have been a slowdown because of the interruption of the supply chain by the earthquake in Japan and sovereign turbulence in Europe but the economy was already weak as shown by virtually flat real disposable income, growing at 0.7 percent annual equivalent that is equal to annual equivalent GDP growth in the first half of 2011.

Further information on income and consumption is provided by Table 11. The 12-month rates of increase of RDPI and RPCE in the past eight months show a trend of deterioration of RDPI from over 3 percent in the final four months of 2010 to less than 3 percent in IQ2011 and then collapsing to a range of 1.2 to 1.4 percent in May-Jul. RPCE growth decelerated less sharply from close to 3 percent in IVQ 2010 to 2.3 percent in Jul and 2.0 percent in Jun. Market participants have been concerned with data in Tables 11 and 12 showing more subdued growth of RPCE. Growth rates of personal income and consumption have weakened. Goods and especially durable goods have been driving growth of PCE as shown by the much higher 12-months rates of growth of real goods PCE (RPCEG) and durable goods real PCE (RPCEGD) than services real PCE (RPCES). The faster expansion of industry in the economy is derived from growth of consumption of goods and in particular of consumer durable goods while growth of consumption of services is much more moderate. The 12 months rates of growth of RPCEGD have fallen from more than 10 percent in Sep 2010 to Feb 2011 to the range of 7.0 to 7.7 percent in the quarter May-Jul. RPEC growth rates have fallen from over 5 percent late in 2010 and early Jan-Feb 2011 to the range of 3.5 to 4.0 percent in the quarter May-Jul.

Table 11, Real Disposable Personal Income and Real Personal Consumption Expenditures Percentage Change from the Same Month a Year Earlier %

	RDPI	RPCE	RPCEG	RPCEGD	RPCES
2011
Jul	1.2	2.3	3.8	7.0	1.6
Jun	1.4	2.0	3.5	6.5	1.2
May	1.3	2.1	4.0	7.7	1.2
Apr	1.8	2.4	4.7	9.2	1.4
Mar	2.4	2.6	4.5	9.3	1.7
Feb	2.7	2.9	5.9	12.8	1.4
Jan	2.8	2.9	5.8	12.0	1.5
2010
Dec	3.2	2.8	5.4	10.2	1.6
Nov	3.6	3.2	5.9	10.2	1.9
Oct	3.8	2.9	6.1	12.2	1.3
Sep	3.1	2.7	5.6	10.5	1.4

Notes: RDPI: real disposable personal income; RPCE: real personal consumption expenditures (PCE); RPCEG: real PCE goods; RPCEGD: RPCEG durable goods; RPCES: RPCE services

Numbers are percentage changes from the same month a year earlier

Source: http://www.bea.gov/newsreleases/national/pi/2011/pdf/pi0711.pdf

Personal income and its disposition are shown in Table 12. An important adversity is shown in Table 12 in the form of sharp deceleration in the growth of wages and salaries to $8.9 billion in Jun relative to May compared with more than $20 billion in the monthly changes in wages and salaries in Mar to Jul. Monthly increases in wages and salaries have been declining from $55.4 billion in Jan 2011 relative to Dec 2010, $20.7 billion in May relative to Apr and recovery to $24.2 billion in Jul relative to Jun.

Table 12, Personal Income and its Disposition, Seasonally Adjusted at Annual Rates $ Billions

	Personal Income	Wages & Salaries	Personal Taxes	DPI	Savings Rate %
Jul	13,067.3	6,695.4	1,410.6	11,656.7	5.0
Jun	13,024.9	6,671.2	1,400.7	11,624.2	5.5
Change Jul/Jun	42.4	24.2	9.9	32.5
May	12,997.2	6,662.3	1,395.6	11,601.6	5.2
Change Jun/ May	27.7	8.9	5.1	22.6
Apr	12,962.5	6,641.6	1,387.2	11,575.3	5.1
Change May/ Apr	34.7	20.7	8.4	26.3
Mar	12,909.7	6,614.8	1,377.7	11,532.1	4.9
Change Apr/ Mar	52.8	26.8	9.5	43.2
Feb	12,850.6	6,582.9	1,367.1	11,483.5	5.0
Change Mar/ Feb	59.1	31.9	10.6	48.6
Jan	12,780.3	6,536.8	1,352.8	11,427.5	5.2
Change Feb/Jan	70.3	46.1	14.3	56.0
Dec 2010	12,625.0	6,481.4	1,247.6	11,377.3	5.2
Change Jan/ Dec	155.3	55.4	105.2	50.2

Source: http://www.bea.gov/newsreleases/national/pi/2011/pdf/pi0711.pdf

IV International Financial Turbulence. The past three months have been characterized by financial turbulence, attaining unusual magnitude in the past month. Table 13, updated with every comment in this blog, provides beginning values on Aug 29 and daily values throughout the week ending on Fr Sep 2 of several financial variables. 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 Aug 26 and the percentage change in that prior week below the label of the financial risk asset. The first five 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 dollars USD per one euro EUR, USD 1.450/EUR in the first row, column 1 in the block for currencies in Table 13 for Fri Aug 26, depreciating to USD 1.4524/EUR on Mon Aug 29, or by 0.2 percent. Table 13 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 13 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 1.4524/EUR on Aug 29; 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 Aug 26, to the last business day of the current week, in this case Fri Sep 2, such as appreciation of 2.0 percent for the dollar to USD 1.4206/EUR by Sep 2; 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 2.0 percent from the rate of USD 1.450/EUR on Fri Aug 26 to the rate of USD 1.4206 on Fri Sep 2 {[1.4206/1.450 – 1]100 = -2.0%} and appreciated by 0.4 percent from the rate of USD 1.4269 on Thu Sep 1 to USD 1.4206 on Fri Sep 2 {[1.4206/1.4269 -1]100 = -0.4%}. The dollar appreciated during the week because more dollars $1.450 were required to buy one euro on Fri Aug 26 than $1.4206 required to buy one euro on Fri Sep

Table 13, Weekly Financial Risk Assets Aug 29 to Sep 2, 2011

Fr Aug 26

M 29

Tu 30

W 31

Th 1

Fr 2

USD/
EUR

1.450

-0.8%

1.4524

-0.2%

1.4442

0.6%

0.7%

1.4372

0.9%

0.3%

1.4269

1.6%

0.7%

1.4206

2.0%

0.4%

JPY/
USD

76.65

0.2%

76.86

-0.3%

76.6665

0.0%

0.3%

76.6130

0.0%

76.9010

-0.3%

76.79

-0.2%

0.1%

CHF/
USD

0.811

-3.2%

0.8158

-0.6%

0.8203

-1.1%

-0.5%

0.8058

0.6%

1.8%

0.7952

1.9%

1.3%

0.783

3.4%

1.5%

CHF/EUR
1.1700

-3.4%

1.1849

-1.3%

1.1847

-1.3%

0.0%

1.1582

1.0%

2.2%

1.1346

3.0%

2.0%

1.1197

4.3%

1.3%

USD/
AUD

1.057

0.9461

1.5%

1.0676

0.9367

1.0%

1.0684

0.9360

1.1%

0.1%

1.0692

0.9353

1.1%

0.0%

1.0737

0.9314

1.6%

0.5%

1.064

0.9398

0.7%

-0.9%

10 Year
T Note

2.202

2.26

2.18

2.23

2.13

1.992

2 Year T Note
0.20

0.34

0.20

0.18

0.20

German Bond

2Y 0.65

10Y 2.16

2Y 0.74

10Y 2.23

2Y 0.66

10Y 2.15

2Y 0.72

10Y 2.22

2Y 0.64

10Y 2.14

2Y 0.52

10Y 2.01

DJIA

11284.54

4.3%

2.3%

2.4%

0.2%

2.9%

0.5%

1.9%

-1.0%

-0.4%

-2.2%

DJ Global

1838.41.

2.8%

2.4%

2.9%

0.5%

4.3%

1.3%

3.6%

-0.7%

1.1%

-2.4%

DJ Asia Pacific

1240.15

0.4%

1.4%

1.8%

1.3%

3.8%

1.1%

4.1%

0.3%

3.2%

-0.9%

Nikkei
8797.78

0.9%

0.6%

1.8%

1.2%

1.8%

0.0%

2.9%

1.2%

1.7%

-1.2%

Shanghai

2612.19

3.1%

-1.4%

-1.7%

-0.4%

-1.7%

0.0%

-2.1%

-0.4%

-3.2%

-1.1%

DAX
5537.48

1.0

2.4%

1.9%

-0.5%

4.5%

2.5%

3.5%

-0.9%

0.02%

-3.4%

DJ UBS Comm.

161.140

1.3%

161.41

0.2%

163.43

1.4%

1.2%

164.430

2.0%

0.6%

162.91

1.1%

-0.9%

162.51

0.9%

-0.2%

WTI $ B
85.450

3.4%

87.540

2.4%

88.720

3.8%

1.3%

88.880

4.0%

0.2%

88.750

3.9%

-0.1%

86.450

1.2%

-2.6%

Brent $/B

111.040

1.9%

111.88

0.8%

113.96

2.6%

1.9%

114.630

3.2%

0.6%

114.060

2.7%

-0.5%

112.30

1.1%

-1.5%

Gold $/B

1826.80

-1.5%

1792.0

-1.9%

1841.9

0.8%

2.8%

1827.90

0.1%

-0.7%

1827.60

0.0%

-0.1%

1876.90

2.7%

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

Franc; AUD: Australian dollar; Comm.: commodities; B: barrel; OZ: ounce

Sources:

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

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

The week was dominated by three events.

1. Greece. Two types of doubts developed during the week on the execution of the Greek rescue program.

i. Finland collateral. James G. Neuger and Sandrine Rastello, writing on Sep 2 on “IMF said to oppose push for Greek Collateral,” published by Bloomberg (http://www.bloomberg.com/news/print/2011-09-02/imf-said-to-oppose-push-for-greek-collateral.html), analyze the demands by Finland of €1 billion cash collateral from Greece as a condition to participate in the second rescue program of €109 billion. Neuger and Rastello obtained information from parties involved in the negotiation that the IMF opposes the Finnish collateral because it would undermine the priority status of the IMF as creditor and would also violate the rights of bondholders. The collateral issue would not jeopardize disbursement of the €8 billion tranche of the first rescue program later in Sep but raises doubts about the execution of the second bailout program that is required because of doubts of the capacity of Greece in funding in international financial markets

ii. Suspension of Official Lenders’ Conversations. Alex Barker, Kerin Hope and Ralph Atkins, writing on Sep 2 on “Lenders suspend Greek bail-out talks,” published in the Financial Times (http://www.ft.com/intl/cms/s/0/7d8aa766-d541-11e0-bd7e-00144feab49a.html#axzz1Wt3oVgji), analyze the suspension by the official lenders of conversations on the Greek execution of the rescue program. The official lenders are the European Union, IMF and European Central Bank. The conversations center on the release of the €8 billion tranche of the first rescue package that is due in Sep. The issue is the gap of €1.2 billion in Greece’s 2011 budget and allegations of inadequate implementation of agreed structural reforms, plans of privatization and enhanced tax collection. Barker, Hope and Atkins quote an increase by 4 basis points of Greek two-year bonds to 37.10 percent, subsequently surpassing 38.00 percent, and a rise in yields of Italian 10-year bonds to 5.25 percent and of Spanish bonds to 5.10 percent. If the European Union and the IMF decide not to release the €8 billion tranche, Greece could be forced into default with repercussions on other countries through exposures to Greek risk by investors and banks

2. World Economy. The release of purchasing managers’ indexes for many countries consolidated the view of deceleration of growth in the world economy to perilous standstill that is close to the point of contraction

3. US Employment. The two above factors combined with the release of the employment situation report of the US showing zero creation of new jobs, falling real wages and high levels of unemployment and underemployment affecting 30 million people

The two major safe-haven currencies, Japanese yen and Swiss franc, remained at very strong levels, undermining the competitiveness of Japanese and Swiss products in foreign markets and relative to imports in domestic markets. The JPY/USD rate remained in a strong range of JPY 76.6130/USD to JPY 76.9010/USD during the week, as shown in Table 13. The Swiss franc appreciated by 3.4 percent versus the dollar to CHF 0.783/USD on Fr Sep 2 and by 4.3 percent versus the euro to CHF 1.1197/EUR. Currency interventions have failed to prevent appreciation in the rounds of risk aversion in international financial markets. The Australian dollar appreciated as much as 1.6 percent by Thu Sep 1 but lost 0.9 percent on Fri Sep 2 and ended stronger by 0.7 percent.

US Treasury securities and German government bonds continue to be used as safe-havens in the flight from risk financial assets. The yield of the US 10-year note dropped from 2.202 percent on Fr Aug 26 to 1.992 percent on Fr Sep 2 (see Table 13). Nick Baker and Rita Nazareth, writing on Sep 2 on “Stocks tumble as 10-year yield nears record low,” published by Bloomberg (http://www.bloomberg.com/news/print/2011-09-02/asia-stocks-end-six-day-rise-as-u-s-futures-drop-franc-climbs-oil-falls.html), find that the yield of 1.99 percent is only four basis points higher than the record low for the yield of the 10-year Treasury note. Zero interest rates and record-low bond yields do not encourage economic recovery in an environment of significant uncertainty. The 2-year Treasury note yield remains virtually fixed at 0.20 percent. Similar yield declines occurred with German government bonds. The 2-year government bond of Germany fell from 0.65 percent on Fr Aug 26 to 0.52 percent on Sep 2 while the 10-year yield collapsed from 2.23 percent on Fr Aug 26 to 2.01 percent on Fr Sep 2.

The early part of the week centered on the possibility of further monetary easing measures as proposed by some participants in the Federal Open Market Committee (FOMC) meeting on Aug 9 as revealed by the minutes released on Aug 30 (http://www.federalreserve.gov/newsevents/press/monetary/fomcminutes20110809.pdf 7):

“Participants discussed the range of policy tools available to promote a stronger economic recovery should the Committee judge that providing additional monetary accommodation was warranted. Reinforcing the Committee’s forward guidance about the likely path of monetary policy was seen as a possible way to reduce interest rates and provide greater support to the economic expansion; a few participants emphasized that guidance focusing solely on the state of the economy would be preferable to guidance that named specific spans of time or calendar dates. Some participants noted that additional asset purchases could be used to provide more accommodation by lowering longer-term interest rates. Others suggested that increasing the average maturity of the System’s portfolio—perhaps by selling securities with relatively short remaining maturities and purchasing securities with relatively long remaining maturities—could have a similar effect on longer-term interest rates. Such an approach would not boost the size of the Federal Reserve’s balance sheet and the quantity of reserve balances. A few participants noted that a reduction in the interest rate paid on excess reserve balances could also be helpful in easing financial conditions. In contrast, some participants judged that none of the tools available to the Committee would likely do much to promote a faster economic recovery, either because the headwinds that the economy faced would unwind only gradually and that process could not be accelerated with monetary policy or because recent events had significantly lowered the path of potential output. Consequently, these participants thought that providing additional stimulus at this time would risk boosting inflation without providing a significant gain in output or employment. Participants noted that devoting additional time to discussion of the possible costs and benefits of various potential tools would be useful, and they agreed that the September meeting should be extended to two days in order to provide more time.”

Statements and minutes of central banks are subject to various types of interpretations. Finance professionals are focusing on the two-day FOMC meeting on Sep 21-22 for possible new monetary policy impulses that could affect risk financial assets (http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm#9662). Another important policy event is the address to Congress by the President on Sep 8 (http://www.whitehouse.gov/the-press-office/2011/08/31/statement-press-secretary-presidents-speech-joint-session-congress):

“The President is focused on the urgent need to create jobs and grow our economy, so he welcomes the opportunity to address a Joint Session of Congress on Thursday, September 8th and challenge our nation's leaders to start focusing 100% of their attention on doing whatever they can to help the American people.”

Equity markets in Table 13 registered strong gains in the week until the release of weak manufacturing economic data on Sep 1 followed by the adverse employment situation report on Sep 2. The indexes shown in Table 13 gained during the week with the exception of decline by 0.4 percent in the DJIA and 3.2 percent by the Shanghai Composite. DAX ended flat with sharp drop of 3.4 percent on Fr Sep 2.

Oil prices were surging during the week until hit by the mood on Fr Sep 2, with WTI gaining 1.2 percent on fears of the new Gulf of Mexico hurricane and Brent advancing 1.1 percent but dropping significant part of much stronger gains during the week. Gold underperformed during the week but jumped 2.7 percent on Fr Sep 2 on the hopes of hedge by investors.

V Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table 14 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 14 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 14. Data for other countries in Table 14 is also updated with reports from their statistical agencies. Economic data for major regions and countries is considered in Section Global Growth Standstill Recession following individual country and regional data tables.

Table 14, 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	-0.7***	0.2	2.5	4.6
China	9.6	6.5	7.5
UK	1.8	4.5* RPI 5.2	5.9* output 18.5* input 13.1**	7.7
Euro Zone	1.7	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	3.7	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.statistics.gov.uk/pdfdir/ppi0811.pdf

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

** Excluding food, beverage, tobacco and petroleum

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-04042011-AP/EN/4-04042011-AP-EN.PDF

***Change from IQ2011 relative to IQ2010 http://www.esri.cao.go.jp/jp/sna/sokuhou/kekka/gaiyou/main_1.pdf

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

Table 15 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 15, 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.”

The 12-month rates of increase of PCE price indexes are shown in Table 16. These data are released at the end of the month in the BEA report on personal income and outlays (http://www.bea.gov/newsreleases/national/pi/2011/pdf/pi0711.pdf) while the CPI and PPI are released in mid month. Headline 12-month PCE inflation (PCE) has accelerated from the range between 1.2 percent and 1.5 percent in Aug-Dec 2010 to 2.3 percent in Apr, 2.6 percent in May and also Jun and 2.8 percent in Jul 2011. Monetary policy uses PCE inflation excluding food and energy (PCEX), at 1.6 percent in Jul, on the basis of research showing that current PCEX is a better indicator of headline PCE a year ahead than current headline PCE inflation (http://cmpassocregulationblog.blogspot.com/2011/04/fed-commodities-price-shocks-global.html http://cmpassocregulationblog.blogspot.com/2011/06/unemployment-and-underemployment-of-24.html http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html). The explanation is that commodity price shocks are “mean reverting,” returning to their long-term means after spiking during shortages caused by climatic factors, geopolitical events and the like. Inflation of PCE goods (PCEG) has accelerated sharply reaching 4.7 percent in Jul from 1 percent or less in Aug-Dec, in spite of 12-month negative inflation of PCE durable goods (PCEG-D) while PCE services inflation (PCES) has remained around 1.6 percent. The last two columns of Table 16 show PCE food inflation (PCEF) and PCE energy inflation (PCEE) that have been rising sharply, especially for energy. Monetary policy expects these increases to revert with its indicator PCEX returning to levels that are acceptable for continuing monetary accommodation.

Table 16, Percentage Change in 12 Months of Prices of Personal Consumption Expenditures ∆%

	PCE	PCEG	PCEG -D	PCES	PCEX	PCEF	PCEE
2011
Jul	2.8	4.7	-0.2	1.8	1.6	4.3	20.1
Jun	2.6	4.5	-0.5	1.6	1.4	3.9	20.8
May	2.6	4.4	-1.0	1.6	1.3	3.6	21.9
Apr	2.3	3.9	-1.4	1.6	1.2	3.3	19.8
Mar	2.0	3.0	-1.8	1.5	1.0	3.1	16.5
Feb	1.8	2.1	-1.8	1.6	1.1	2.4	11.9
Jan	1.5	1.2	-2.3	1.6	1.0	1.8	7.9
2010
Dec	1.4	1.0	-2.5	1.5	0.9	1.3	8.3
Nov	1.2	0.4	-2.4	1.5	1.0	1.3	4.1
Oct	1.3	0.6	-2.1	1.6	1.0	1.3	6.3
Sep	1.4	0.4	-1.7	1.9	1.2	1.3	4.1
Aug	1.5	0.4	-1.4	1.9	1.4	0.7	3.8

Notes: percentage changes in price index relative to the same month a year earlier of PCE: personal consumption expenditures; PCEG: PCE goods; PCEG-D: PCE durable goods; PCES: PCE services; PCEX: PCE excluding food and energy; PCEF: PCE food; PCEE: PCE energy goods and services

Source: http://www.bea.gov/newsreleases/national/pi/2011/pdf/pi0711.pdf

The role of devil’s advocate is played by data in Table 17. Headline PCE inflation (PCE) has jumped to 1.7 percent cumulative in the first seven months of 2011, which is equivalent to 2.9 percent annual, with PCEG jumping to 3.2 percent cumulative and 5.6 percent annual equivalent, PCEG-D rising 0.7 percent cumulative or 1.2 percent annual, and PCES rising to 1.4 percent cumulative and 2.4 percent annual. All these headline inflation data are much higher in the first seven months of 2011 than in Sep-Dec 2010. PCEX, used in monetary policy, rose to 1.0 percent cumulative or 2.0 percent annual in the first seven months of 2011 compared with only 0.5 percent cumulative and 1.5 percent annual equivalent in Sep-Dec 2010. PCEF has increased by 3.7 percent cumulative, which is equivalent in a full year to 6.3 percent. PCEE has risen to 10.9 percent cumulative or 19.4 percent annual equivalent with decline by 1.2 percent in May and decline by 4.5 percent in Jun.

Table 17, Monthly and Jan-Jun PCE Inflation and Annual Equivalent Jan-Jul 2011 and Sep-Dec 2010 ∆%

	PCE	PCEG	PCEG -D	PCES	PCEX	PCEF	PCEE
2011
Jan-Jul 2011	1.7	3.2	0.7	1.4	1.4	3.7	10.9
Jan-Jul 2011 AE	2.9	5.6	1.2	2.4	2.4	6.3	19.4
Jul	0.4	0.7	-0.1	0.2	0.2	0.4	2.8
Jun	-0.1	-0.5	0.2	0.1	0.2	0.1	-4.5
May	0.2	0.0	0.1	0.3	0.3	0.3	-1.2
Apr	0.3	0.6	0.2	0.2	0.2	0.4	2.3
Mar	0.4	0.8	0.0	0.2	0.1	0.9	3.7
Feb	0.4	0.8	0.2	0.2	0.2	0.8	3.5
Jan	0.4	0.8	0.1	0.2	0.2	0.7	2.3
Sep-Dec 2010	0.7	1.2	-1.0	0.4	0.2	0.5	8.4
Sep-Dec 2010 AE	2.1	3.7	-2.9	1.2	0.6	1.5	7.4
Dec	0.3	0.6	-0.4	0.1	0.0	0.1	4.1
Nov	0.1	0.0	-0.2	0.1	0.1	0.0	0.1
Oct	0.2	0.4	-0.2	0.1	0.1	0.1	2.8
Sep	0.1	0.2	-0.2	0.1	0.0	0.3	1.2

Notes: AE: annual equivalent; percentage changes in a month relative to the same month for the same symbols as in Table.

Source: http://www.bea.gov/newsreleases/national/pi/2011/pdf/pi0711.pdf

Industrial producer prices in the euro zone rose 6.1 percent in Jul 2011 relative to Jul 2010, 5.9 percent in Jun and 6.2 percent in May, as shown in Table 18. Energy, as in other regions and countries, is the driver of producer price inflation in the euro zone with double digit 12-month increases: 11.9 percent in Jul, 10.7 percent in Jun and 11.8 percent in May. Nondurable consumer goods and intermediate goods also show high rates of 12 months increase. Prices of capital goods remain subdued with 12 months increases just below 2 percent.

Table 18, Euro Zone, Industrial Producer Prices 12 Months ∆%

	Jul 2011	Jun 2011	May 2011
Industry ex Construction	6.1	5.9	6.2
Industry ex Construction & Energy	4.1	4.1	4.2
Intermediate Goods	6.3	6.3	6.6
Energy	11.9	10.7	11.8
Capital Goods	1.4	1.4	1.2
Durable Consumer Goods	1.8	1.8	1.9
Nondurable Consumer Goods	3.6	3.7	3.8

Source: http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home

Consumer prices in Germany fell 0.1 percent in Aug relative to Jul 2011 with the 12 months rate of inflation at 2.3 percent, as shown in Table 19. The annual equivalent rate of consumer price inflation in the first eight months of 2011 is 1.8 percent. The increases in consumer price inflation in Feb and Mar by 0.5 percent have moderated with the exception of 0.4 percent in Jul.

Table 19, Germany, Consumer Price Index ∆%

	Month	12 Months
Aug 2011	-0.1	2.3
Jul	0.4	2.4
Jun	0.1	2.3
May	0.0	2.3
Apr	0.2	2.4
Mar	0.5	2.1
Feb	0.5	2.1
Jan	-0.4	2.0
AE ∆%	1.8
Dec 2010	1.0	1.7

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/08/PE11__310__611,templateId=renderPrint.psml

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

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/07/PE11__278__611,templateId=renderPrint.psml

Italy’s consumer price inflation was 0.3 percent in Aug and the 12 months rate of inflation rose to 2.8 percent, as shown in Table 20. The annual equivalent rate of inflation in the first eight months of 2011 is at a high 3.7 percent. Inflation has climbed in 2011 from 1.9 percent in the 12 months ending in Dec 2010 to 2.8 percent in the 12 months ending in Aug 2011.

Table 20, Italy, Consumer Price Index

	Month	12 Months
Aug 2011	0.3	2.8
Jul	03	2.7
Jun	0.1	2.7
May	0.1	2.6
Apr	0.5	2.6
Mar	0.4	2.5
Feb	0.3	2.4
Jan	0.4	2.1
AE ∆%	3.7
Dec 2010	0.4	1.9

Source: http://www.istat.it/salastampa/comunicati/in_calendario/precon/20110714_00/testointegrale20110714.pdf

http://www.istat.it/en/archive/37218

Inflation of industrial prices in Italy has moderated in the months from May to Jul 2011 relative to the surge in Jan-Apr caused by the commodity price shock, as shown in Table 21. Inflation of producer prices did rise to 0.3 percent in Jul, raising the 12 month rate to 4.9 percent. The impact of energy and commodity prices is clearly shown by the drop of 5.4 percent in 2009 after collapse of oil prices at the end of 2008. Low inflation of industrial prices from 2001 to 2003 was followed by rapidly rising prices after 2004 when investors reallocated funds to commodity carry trades in response to the low interest policies pursued by monetary policy. The resurgence of inflation in early 2011 is also the result of carry trades from zero interest rates to highly leveraged positions in commodity futures.

Table 21, Italy, Industrial Prices

	Month ∆%	12 Months ∆%
Jul 2011	0.3	4.9
Jun	0.0	4.6
May	-0.2	4.8
Apr	0.7	5.6
Mar	0.8	6.2
Feb	0.7	5.8
Jan	1.2	5.3
AE ∆%	6.8
Dec 2010	0.7	4.7
Year
2010		3.0
2009		-5.4
2008		5.9
2007		3.3
2006		5.2
2005		4.0
2004		2.7
2003		1.6
2002		0.2
2001		1.9

Source:

http://www.istat.it/it/archivio/37207

The structure of industrial prices in Italy by components is shown in Table 22. Energy rose by a very high 1.5 percent in Jul relative to Jun as Europe became more exposed to events in oil markets. In 12 months ending in Jul, energy prices rose 8.8 percent while prices of durables rose only 1.8 percent. Energy and other commodities insufficiency in Europe results in adverse shocks to its terms of trade, which are prices of exports relative to prices of imports.

Table 22, Italy, Industrial Prices

	Jul 2011/ Jun 2011	Jul 2011/ Jul 2010
Total	0.3	4.9
Consumer Goods	0.1	3.2
Durable Goods	0.1	1.8
Nondurable	0.0	3.6
Intermediate	-0.2	5.8
Energy	1.5	8.8

Source: http://www.istat.it/it/archivio/37207

VI Global Growth Standstill Recession. Multiple sections below provide the regional and country data tables and updates of new releases of economic indicators.

VIA United States. The Chicago Business Barometer Index™ of the Institute for Supply Management (ISM) of Chicago fell in Aug to a 21-month low (https://www.ism-chicago.org/chapters/ism-ismchicago/files/ISM CAugust2011ISMHomepage1314883657892.pdf). The index fell 4.2 points from 62.9 in Jul to 58.7 in Aug and seasonally adjusted (SA) declined 2.3 points from 58.8 in Jul to 56.5 in Aug. The decline of the production index was quite sharp by 8.5 points from 68.5 in Jul to 60.0 in Aug and by 6.5 points in the SA index from 64.3 in Jul to 57.8 in Aug. The new orders index lost 6 points from 65.0 in Jul to 59.0 in Aug and the SA index fell 2.5 points from 59.4 in Jul to 56.9 in Aug. The Chicago ISM index also points to deceleration of growth.

Bradley J. Holcomb, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee summarizes the Manufacturing ISM Report on Business^® as follows (http://www.ism.ws/ISMReport/MfgROB.cfm):

"The PMI registered 50.6 percent, a decrease of 0.3 percentage point from July, indicating expansion in the manufacturing sector for the 25th consecutive month, at a slightly slower rate. The Production Index registered 48.6 percent, indicating contraction for the first time since May of 2009, when it registered 45 percent. The New Orders and Backlog of Orders Indexes edged up slightly from July, but both indexes are indicating contraction in August at slower rates than in July. The rate of increase in prices slowed for the fourth consecutive month, dropping another 3.5 percentage points in August to 55.5 percent. The overall sentiment is one of concern and caution over the domestic and international economic environment, which is affecting customers' confidence and willingness to place orders, at least in the short term."

There are two worrisome aspects of this report: (1) the overall index at 50.6 percent is closer to the borderline of expansion/contraction of 50; and (2) there are segments in contraction, returning to levels of May 2009, when the economy was still in recession for production, and contraction in new orders, which is an indicator of future activity. The index reflects concerns on deceleration of growth worldwide and in the US.

Table USA provides the most recent entries in this blog for changes in key indicators for the US. The table provides a brief summary and there are links to the comment where the data were analyzed most recently. All the regional/country data tables below are preceded by brief analysis of purchasing managers’ indexes for Aug, which are the earliest indicators available.

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 May 2011 4.250 million lower by 1.256 million than 5.506 million in May 2001 Blog 08/21/11
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
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-Jun 2011/2010 ∆%: Total 15.2; Durable Goods: 11.9; Nondurable Goods 17.8 Blog 08/14/11
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 Jun SA -$53,067 million versus May -$50,831 million Exports Jun SA ∆%: -2.3 Imports Jun SA ∆%: -0.8 Exports Jan-Jun 2011/2010 NSA ∆%: 18.3 Imports Jan-Jun 2011/2010 NSA ∆%: 17.9 Blog 08/14/11
Export and Import Prices	Jun 12 months NSA ∆%: Imports 13.6; Exports 9.9 Blog 08/21/11
Consumer Credit	Jun ∆% annual rate: 7.7% 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

The Bureau of Labor Statistics (BLS) has revised the estimates for productivity and unit costs. Table 23 provides the data for nonfarm business sector productivity and costs for IIQ2011 as seasonally adjusted annual equivalent rate (SAAE), IIQ2011 relative to the same quarter a year earlier and the revised data for IQ2011. Reflecting increases in output of 1.3 percent and of 2.0 percent in hours worked, nonfarm business sector labor productivity fell at a seasonally-adjusted annual equivalent (SAAE) rate of 0.7 percent in IQ2011, as shown in column 2 “IIQ2011 SAEE.” The year-to-year increase of labor productivity from IIQ2010 to IIQ2011 was 0.7 percent, reflecting increases in output of 2.4 percent and of hours worked of 1.6 percent, as shown in column 3 “IIQ2011 year to year.” Unit labor costs rose by 3.3 percent in IIQ2011 and by 1.9 percent in IIQ2011 year to year. Hourly compensation in IIQ2011 SAAE rose 2.7 percent, which deflated by the estimated consumer price increase SAAE in IIQ2011 results in a decline of real hourly compensation by 1.4 percent. Unit labor costs are increasing at a rate close to CPI inflation but real hourly compensation is declining.

Table 23, US, Nonfarm Business Sector Productivity and Costs %

	IIQ2011 SAAE	IIQ2011 Year to Year	IQ2011 SAAE	IQ2011 Year to Year
Produc-tivity	-0.7	0.7	-0.6	1.2
Output	1.3	2.4	0.9	3.2
Hours	2.0	1.6	1.5	1.9
Hourly Comp.	2.7	2.7	5.6	2.6
Real Hourly Comp.	-1.4	-0.7	0.3	-0.4
Unit Labor Costs	3.3	1.9	6.2	1.4
Unit Nonlabor Payments	1.5	1.6	-3.1	2.0
Implicit Price Deflator	2.6	1.8	2.2	1.7

Notes: SAAE: seasonally adjusted annual equivalent; Comp.: compensation

Source: http://www.bls.gov/news.release/pdf/prod2.pdf

The revised increases in productivity in Table 24 of 4.1 percent in the 2010 annual average and 2.3 percent in the 2009 annual average were facilitated by reductions in hours worked of 0.1 percent in 2010 and 7.2 percent in 2009. The contraction period and the recovery period have been characterized by savings of labor inputs. The report on productivity and costs confirms a weak economy in IIQ2011 and losses in real hourly compensation of labor with likely adverse effects on consumption. The GDP report with growth of only 1.0 percent at SAAE rate in IIQ2011 or 0.25 percent in the quarter is consistent with these data.

Table 24, US, Revised Nonfarm Business Sector Productivity and Costs Annual Average ∆% Annual Average

	2010 Annual Average ∆%	2009 Annual Average ∆%	2008 Annual Average ∆%
Productivity	4.1	2.3	0.6
Output	4.0	-5.1	-1.5
Hours	-0.1	-7.2	-2.1
Hourly Comp.	2.1	1.6	3.4
Real Hourly Comp.	0.4	2.0	-0.4
Unit Labor Costs	-2.0	-0.7	2.8
Unit Nonlabor Payments	5.7	3.1
Implicit Price Deflator	1.1	0.7

Notes: SAAE: seasonally adjusted annual equivalent; Comp.: compensation

Source: http://www.bls.gov/news.release/pdf/prod2.pdf

Shipments and orders of manufacturers are very important indicators but difficult in interpretation because of wide monthly oscillations originating sometimes in high values of some items. Table 25 provides monthly changes of the total value of shipments and new orders of manufacturers in the US for Jul, Jun and May. An important aspect is the improvement from decline of new orders by 0.4 percent in Jun to strong increase by 2.4 percent in Jul. Excluding more volatile transportation, both shipments and new orders rose 0.9 percent. New orders of durable goods rose a very strong 4.1 percent and shipments 2.4 percent. There is softness in new orders of computers and electronic products falling 3.4 percent and of computers by 7.5 percent. Shipments of automobiles rose 4.8 percent with strong sales. Nondefense aircraft of high-value new orders rose 43.4 percent in Jul after falling 24.0 percent in Jun.

Table 25, US, Value of Manufacturers’ Shipments and New Orders, SA, %

	Jul/Jun ∆%	Jun/May ∆%	May/Apr ∆%
All Mfg Industries
S	1.6	0.6	0.0
NO	2.4	-0.4	0.6
Excluding Transport
S	0.9	0.6	0.0
NO	0.9	0.4	0.0
Excluding Defense
S	1.8	0.6	0.0
NO	2.6	-0.2	0.4
Durable Goods
S	2.4	1.1	0.5
NO	4.1	-1.1	2.0
Machinery
S	-0.8	4.2	2.3
NO	-0.2	-1.4	2.5
Computers & Electronic Products
S	2.1	-1.2	-0.8
NO	-3.4	0.9	0.4
Computers
S	3.1	3.6	-4.6
NO	-7.5	2.6	1.0
Transport Equipment
S	8.0	0.3	-0.6
NO	14.8	-6.6	5.8
Automobiles
S	4.8	1.2	-0.4
Motor Vehicles
S	10.0	-2.6	1.4
NO	9.8	-2.0	1.6
Nondefense Aircraft
S	7.9	3.2	-1.5
NO	43.4	-24.0	31.4

Note:Mfg: manufacturing; S: shipments; NO: new orders; Transport: transportation

Source: http://www.census.gov/manufacturing/m3/prel/pdf/s-i-o.pdf

Shipments and new orders of manufacturers are not adjusted for price changes. Table 26 provides the value of manufacturers’ shipments and new orders for the first seven months of 2011 relative to the first seven months of 2010. High percentage increases reflect both price increases and physical volume increases. The producer price index (PPI) of the US rose 7.2 percent in Jul 2011 relative to Jul 2010 (http://www.bls.gov/news.release/pdf/ppi.pdf). If the appropriate price change for deflating these data were around 7 percent, which could be high because of the moderation of monthly PPI inflation recently, some segments have shown high volume increases while others may have contracted.

Table 26, US, Value of Manufacturers’ Shipments and New Orders, NSA, %

	Jan-Jul 2011/Jan-Jul 2010 ∆%
All Manufacturing Industries
S	11.6
NO	12.6
Excluding Transport
S	12.6
NO	12.9
Excluding Defense
S	12.6
NO	13.3
Durable Goods
S	9.5
NO	9.5
Machinery
S	10.7
NO	16.2
Computers & Electronic Products
S	2.9
NO	1.0
Computers
S	15.4
NO	14.5
Transport Equipment
S	3.9
NO	10.4
Automobiles	4.6
S	4.6
Motor vehicles
S	7.1
NO	8.0
Nondefense Aircraft
S	5.8
NO	29.1

Note: S: shipments; NO: new orders; Transport: transportation

Source: http://www.census.gov/manufacturing/m3/prel/pdf/s-i-o.pdf

Chart 3 of the US Census Bureau of the Department of Commerce reveals the significant fluctuations of new orders of manufacturers. There are only five negative percentage changes as some high-value items disappear from the series and large jumps as activity in those items reenters.

Chart 3, Manufacturers’ New Orders

Source: http://www.census.gov/briefrm/esbr/www/esbr022.html

Value in construction put in place in the US in seasonally adjusted annual rate (SAAR) and percentage change from the prior month is shown in Table 27. Total SSAR value of construction fell 1.3 percent in Jul relative to Jun. There were declines in all components.

Table 27, US, Value of Construction Put in Place in the United States Billion Dollars and ∆% from Prior Month

	Jul 2011 SAAR $ Billions	∆%
Total	789.5	-1.3
Residential	255.8	-1.6
Nonresidential	533.7	-1.1
Total Private	514.5	-0.9
Total Public	275.0	-2.1

SAAR: seasonally adjusted annual rate; B: billions

Source: http://www.census.gov/const/C30/pr201103.pdf

Table 28 provides monthly and 12 months rate of change of the value of construction put in place in the US. There were gains in Jun of 1.6 percent, 2.5 percent in May and 0.7 percent in Apr that nearly erased the 12 month decline to only 0.5 percent in Jun and Jul. Construction fell again by 1.3 percent in Jul. The annual equivalent rate of decline in the first seven months of the year is 2.0 percent.

Table 28, US, Percentage Change in Value of Construction Put in Place, ∆%

	Value NSA Month $ Billions	Month ∆% SA	12 Months ∆% NSA
Jul 2011	72.9	-1.3	-0.5
Jun	73.1	1.6	-0.5
May	67.3	2.5	-1.8
Apr	61.8	0.7	-9.5
Mar	56.7	-0.2	-8.4
Feb		-1.0	-6.3
Jan	52.6	-1.0	-7.6
AE ∆%		-2.0
Dec 2010	59.8	-3.2	-6.8

Source: http://www.census.gov/const/C30/prpdf.html various reports using final data

Chart 4 of the US Census Bureau of the Department of Commerce provides an excellent visual analysis of construction put in place in the US since 1993 in seasonally adjusted annual rates (SAAR). The appetite for homeownership together with subsidies over decades in tax exemptions, Fannie, Freddie and multiple programs created a sharply upward trend of construction from 1993 to 2006. The trend of the series accentuated after 2003 with the subsidy of low interest rates that stimulated residential and nonresidential construction. Eventually, overproduction resulted in another vertical slope after 2006 but this time negative. The series appears to have bottomed but with no resumption of growth.

Chart 4, US Construction Expenditures 1993-2011

Source: http://www.census.gov/briefrm/esbr/www/esbr050.html

Percentage changes of construction in the first seven months of the year not seasonally-adjusted from 2005 to 2011 are shown in Table 29. Construction fell 30.9 percent from Jan-Jul 2005 to Jan-Jul 2011 and 36.0 percent from 2006. It is doubtful that further lowering of interest rates and bond yields from current levels near or at historic lows will promote construction.

Table 29, US, Value of Construction Put in Place in the United States, Not Seasonally Adjusted, $ Billions and ∆%

Jan-Jul 2011 $ B	435.5
Jan-Jul 2010 $ B	451.2
∆% to 2011	-3.5
Jan-Jul 2006 $ B	680.9
∆% to 2011	-36.0
Jan-Jul 2005 $ B	630.2
∆% to 2011	-30.9

Source: http://www.census.gov/const/C30/pr201103.pdf

http://www.census.gov/const/C30/pr200707.pdf

http://www.census.gov/const/C30/pr200607.pdf

Table 30 shows the euphoria of prices during the boom and the subsequent decline. House prices rose by 93.7 percent in the 10-city composite of the Case-Shiller home price index and 78.1 percent in the 20-city composite between Jun 2000 and Jun 2005. Prices rose by more than 100 percent from Jun 2000 to Aug 2006, increasing109.2 percent for the 10-city composite; and almost doubled, increasing by 93.1 percent for the 20-city composite. Prices have fallen 31.3 percent since 2006 for the 10-city composite and by 31.5 percent for the 20-city composite. Measuring house prices is quite difficult because of the lack of homogeneity that is typical of standardized commodities.

Table 30, US, Percentage Changes of Standard & Poor’s Case-Shiller Home Price Indices, Not Seasonally Adjusted, ∆%

	10-City Composite	20-City Composite
∆% Jun 2000 to Jun 2003	38.8	32.4
∆% Jun 2000 to Jun 2005	93.7	78.1
∆% Jun 2000 to Aug 2006	109.2	93.1
∆% Jun 2000 to Jun 2011	43.6	32.4
∆% Jun 2005 to Jun 2011	-25.8	-25.7
∆% Aug 2006 to Jun 2011	-31.3	-31.5
∆% Jun 2009 to Jun 2011	0.9	-0.5
∆% Jun 2010 to Jun 2011	-3.8	-4.5

Source: http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----

House prices have continued to decline from Dec 2010 to Jun 2011, as shown in Table 31, both monthly price changes and 12-month price changes. There is no prospect for a boom in housing because of the paucity of available credit at higher lending standards and the fractured state of the housing finance sector. Funding for home loans is obtained by securitizing individual mortgages in bonds that are sold to investors who in turn finance them in sale and repurchase agreements. That system is fractured. Nick Timiraos, Robin Sidel and ruth Simon, writing on Sep 3 on “US sues big banks over home mortgages,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424053111903895904576546904174271250.html?mod=WSJ_hp_LEFTWhatsNewsCollection) analyze the industry of home mortgages in the new event of law suits filed by the Federal Housing Finance Agency (FHFA) against 17 of the world’s largest financial institutions over $196 billion of home loans sold to Fannie Mae and Freddie Mac. FHFA is the regulatory agency of Fannie and Freddie. Given this uncertainty, home mortgages will become even more difficult even for the extremely reduced demand in an environment of near zero economic growth, near zero job creation and falling real wages even if interest rates are negative in real or adjusted inflation terms.

Table 31, Monthly Percentage Change of S&P Case-Shiller Home Price Indices, Seasonally Adjusted, ∆%

	10-City Composite	20-City Composite
Jun	0.04	-0.1
May	-0.01	-0.1
Apr	0.3	0.4
Mar	-0.4	-0.7
Feb	-0.4	-0.3
Jan	-0.4	-0.3
Dec 2010	-0.4	-0.4

Source: http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----

Let V(T) represent the value of the firm’s equity at time T and B stand for the promised debt of the firm to bondholders and assume that corporate management, elected by equity owners, is acting on the interests of equity owners. Robert C. Merton (1974, 453) states:

“On the maturity date T, the firm must either pay the promised payment of B to the debtholders or else the current equity will be valueless. Clearly, if at time T, V(T) > B, the firm should pay the bondholders because the value of equity will be V(T) – B > 0 whereas if they do not, the value of equity would be zero. If V(T) ≤ B, then the firm will not make the payment and default the firm to the bondholders because otherwise the equity holders would have to pay in additional money and the (formal) value of equity prior to such payments would be (V(T)- B) < 0.”

Pelaez and Pelaez (The Global Recession Risk (2007), 208-9) apply this analysis to the US housing market in 2005-2006 concluding:

“The house market [in 2006] is probably operating with low historical levels of individual equity. There is an application of structural models [Duffie and Singleton 2003] to the individual decisions on whether or not to continue paying a mortgage. The costs of sale would include realtor and legal fees. There could be a point where the expected net sale value of the real estate may be just lower than the value of the mortgage. At that point, there would be an incentive to default. The default vulnerability of securitization is unknown.”

There are multiple important determinants of the interest rate: “aggregate wealth, the distribution of wealth among investors, expected rate of return on physical investment, taxes, government policy and inflation” (Ingersoll 1987, 405). Aggregate wealth is a major driver of interest rates (Ibid, 406). Unconventional monetary policy, with zero fed funds rates and flattening of long-term yields by quantitative easing, causes uncontrollable effects on risk taking that can have profound undesirable effects on financial stability. Excessively aggressive and exotic monetary policy is the main culprit and not the inadequacy of financial management and risk controls.

The net worth of the economy depends on interest rates. In theory, “income is generally defined as the amount a consumer unit could consume (or believe that it could) while maintaining its wealth intact” (Friedman 1957, 10). Income, Y, is a flow that is obtained by applying a rate of return, r, to a stock of wealth, W, or Y = rW (Ibid). According to a subsequent restatement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption decisions is the long-run expected yield from wealth r*W. This yield was named permanent income: Y* = r*W” (Darby 1974, 229), where * denotes permanent. The simplified relation of income and wealth can be restated as:

W = Y/r (1)

Equation (1) shows that as r goes to zero, r →0, W grows without bound, W→∞.

Lowering the interest rate near the zero bound in 2003-2004 caused the illusion of permanent increases in wealth or net worth in the balance sheets of borrowers and also of lending institutions, securitized banking and every financial institution and investor in the world. The discipline of calculating risks and returns was seriously impaired. The objective of monetary policy was to encourage borrowing, consumption and investment but the exaggerated stimulus resulted in a financial crisis of major proportions as the securitization that had worked for a long period was shocked with policy-induced excessive risk, imprudent credit, high leverage and low liquidity by the incentive to finance everything overnight at close to zero interest rates, from adjustable rate mortgages (ARMS) to asset-backed commercial paper of structured investment vehicles (SIV).

The consequences of inflating liquidity and net worth of borrowers were a global hunt for yields to protect own investments and money under management from the zero interest rates and unattractive long-term yields of Treasuries and other securities. Monetary policy distorted the calculations of risks and returns by households, business and government by providing central bank cheap money. Short-term zero interest rates encourage financing of everything with short-dated funds, explaining the SIVs created off-balance sheet to issue short-term commercial paper to purchase default-prone mortgages that were financed in overnight or short-dated sale and repurchase agreements (Pelaez and Pelaez, Financial Regulation after the Global Recession, 50-1, Regulation of Banks and Finance, 59-60, Globalization and the State Vol. I, 89-92, Globalization and the State Vol. II, 198-9, Government Intervention in Globalization, 62-3, International Financial Architecture, 144-9). ARMS were created to lower monthly mortgage payments by benefitting from lower short-dated reference rates. Financial institutions economized in liquidity that was penalized with near zero interest rates. There was no perception of risk because the monetary authority guaranteed a minimum or floor price of all assets by maintaining low interest rates forever or equivalent to writing an illusory put option on wealth. Subprime mortgages were part of the put on wealth by an illusory put on house prices. The housing subsidy of $221 billion per year created the impression of ever increasing house prices. The suspension of auctions of 30-year Treasuries was designed to increase demand for mortgage-backed securities, lowering their yield, which was equivalent to lowering the costs of housing finance and refinancing. Fannie and Freddie purchased or guaranteed $1.6 trillion of nonprime mortgages and worked with leverage of 75:1 under Congress-provided charters and lax oversight. The combination of these policies resulted in high risks because of the put option on wealth by near zero interest rates, excessive leverage because of cheap rates, low liquidity because of the penalty in the form of low interest rates and unsound credit decisions because the put option on wealth by monetary policy created the illusion that nothing could ever go wrong, causing the credit/dollar crisis and global recession (Pelaez and Pelaez, Financial Regulation after the Global Recession, 157-66, Regulation of Banks, and Finance, 217-27, International Financial Architecture, 15-18, The Global Recession Risk, 221-5, Globalization and the State Vol. II, 197-213, Government Intervention in Globalization, 182-4).

VIB Japan. The report of Markit/JMMA Japan Manufacturing PMI™ is one of the most encouraging worldwide (http://www.markit.com/assets/en/docs/commentary/markit-economics/2011/sep/JP_Manufacturing_ENG_1109_PR.pdf). Japan continues to move toward restoring its economy from the devastation caused by the Mar 11 earthquake/tsunami. The most encouraging sign is that new order growth reached a six-month high in Aug. Japan’s is one of the most efficient export economies in the world. Although new business expanded at a fast rate, manufacturing output growth was the slowest in three months because of growth of new export orders falling at the fastest rate of decline since Apr. The weakness of export orders can be traced in most cases to the overvalued Japanese yen and to weakness in orders from China.

Table JPY provides the country data for Japan. There was a brutal impact on the economy of Japan from the earthquake/tsunami of Mar 11. Japan’s recovery has been V-shaped. The hurdle now is renewed growth of export orders and calmer risk aversion in the world that allows for much needed depreciation of the Japanese yen to maintain the country’s competitiveness.

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 ∆%: –0.3 on IQ2011; Seasonally adjusted annual equivalent rate ∆%: –1.3 ∆% from quarter a year earlier: –0.9% Blog 08/14/11
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	Apr-Jun 2011 ∆% –9.6 Forecast Jul –Sep 2011 ∆% –0.9 Jun ∆% Excluding Volatile Orders 7.7 Blog 08/14/2011
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

The employment report of Japan is in Table 32. The number of unemployed of 2.92 million has declined by 360,000 from the earlier year and the unemployment rate SA rose from 4.6 percent in Jun to 4.7 percent in Jul.

Table 32, Japan, Employment Report Jul 2011

Unemployed	2.92 million
Change since last year	-360 thousand; ∆% –7.3
Unemployment rate	4.7% SA +0.1 from 4.6% in Jun –0.3% from earlier year
Population	105.6 million
Labor Force	62.7 million
Change since last year	-41 thousand ∆% –0.7
Employed	59.73 million
Change since last year	-200 thousand ∆% –0.3
Labor force participation rate	59.4%
Change since last year	-0.3
Employment rate	56.6%
Change since last year	-0.2

Source: http://www.stat.go.jp/english/data/roudou/154.htm

Chart 5 of Japan’s Statistics Bureau at the Ministry of Internal Affairs and Communications provides the unemployment rate. There was sharp increase to more than 5 percent during the recession in 2009. Japan’s unemployment rate has decline in ups and downs with a slight upward spike after the earthquake/tsunami.

Chart 5, Japan, Unemployment Rate 2009-2011

Source: http://www.stat.go.jp/english/data/roudou/154.htm

Wholesale and retail sales in Japan in Table 33 have recovered from the impact of the earthquake/tsunami on Mar 11. The sharpest impact was the fall of retail sales by 8.3 percent in Mar and 4.8 percent in Apr with increases of 1.2 percent in Jun and 0.7 percent in Jul. Wholesale sales were performing much better before the March natural disaster, falling only in Apr by 1.7 percent and moving forward at a fast pace of 3.8 percent in Jun and 3.2 percent in Jul.

Table 33, Japan, Wholesale and Retail Sales 12 Month ∆%

	Total	Wholesale	Retail
Jul 2011	2.5	3.2	0.7
Jun	3.1	3.8	1.2
May	1.3	2.3	-1.3
Apr	-2.6	-1.7	-4.8
Mar	-1.3	1.2	-8.3
Feb	5.3	7.2	0.1
Jan	3.3	4.6	0.1
Dec 2010	3.5	5.7	-2.1
Calendar Year
2010	1.5	1.1	2.5
2009	-20.5	-25.6	-2.3
2008	1.2	1.5	0.3

Source: http://www.meti.go.jp/english/statistics/tyo/syoudou/index.html

The family income and expenditure survey of Japan is in Table 34. Total consumption in nominal terms fell 1.8 percent in Jul 2011 relative to Jul 2010. The decline in real total consumption in Jul relative to a year earlier was sharper at 2.1 percent. As most advanced economies, Japan is struggling with domestic demand. Wholesale demand was sufficiently strong to maintain manufacturing activity.

Table 34, Japan, Family Income and Expenditure Survey 12-months ∆% Relative to a Year Earlier

Jul 2011	Nominal	Real
Households of Two or More Persons
Total Consumption	-1.8	-2.1
Excluding Housing, Vehicles & Remittance		-1.0
Food	1.1	0.8
Housing	15.9	16.2
Fuel, Light & Water Charges	0.6	-2.7
Furniture & Household Utensils	-0.1	4.9
Clothing & Footwear	-1.6	-1.9
Medical Care	-2.4	-1.5
Transport and Communications	-14.7	-16.1
Education	5.6	5.4
Culture & Recreation	4.5	8.4
Other Consumption Expenditures	-6.0	-6.3*
Workers’ Households
Income	1.9	1.6
Disposable Income	1.4	1.1
Consumption Expenditures	-2.3	-2.6

*Real: nominal deflated by CPI excluding imputed rent

Source: http://www.stat.go.jp/english/data/kakei/156.htm

Japan’s industrial production in Table 35 provides further evidence of V-shaped recovery from the earthquake/tsunami. There was a brutal impact on industrial production by the natural disaster with a drop of 15.5 percent in the month of Mar. Industrial production grew 1.6 percent almost immediately in Apr, 6.2 percent in May, 3.8 percent in Jun and 0.6 percent in Jul. The 12-month rate of growth of industrial production rose from negative 13.6 percent in Apr to only negative 2.8 percent in Jul.

Table 35, Japan, Industrial Production ∆%

	∆% Month SA	∆% 12 Months NSA
Jul 2011	0.6	-2.8
Jun	3.8	-1.7
May	6.2	-5.5
Apr	1.6	-13.6
Mar	-15.5	-13.1
Feb	1.8	2.9
Jan	0.0	4.6
Dec 2010	2.4	5.9
Calendar Year
2010		16.7
2009		-21.3
2008		-3.2

Source: http://www.meti.go.jp/statistics/tyo/iip/result/pdf/press/h2a1007j.pdf

VIC China. The HSBC China Manufacturing PMI™ compiled by Markit shows continued weakness in the manufacturing sector of China (http://www.markit.com/assets/en/docs/commentary/markit-economics/2011/sep/CN_Manufacturing_ENG_1109_PR.pdf). The index rose from 49.3 in Jul to 49.9 in Aug. New business of manufacturers fell in Aug for the first time in 13 months but only slightly. Output grew marginally in manufacturing. The worrisome aspects were the first decline in new business registered since Jul 2010 and the fourth consecutive monthly decline in new export business. The respondents found slow demand from abroad. Table CNY provides the country data table for China.

Table CNY, China, Economic Indicators

Price Indexes for Industry	Jul 12 months ∆%: 7.5 Jan-Jul ∆%: 7.1 Blog 08/14/11
Consumer Price Index	Jul month ∆%: 0.5 Jul 12 month ∆%: 6.5 Jan-Jul ∆%: 5.5 Blog 08/14/11
Value Added of Industry	Jul 12 month ∆%: 14.0 Blog 08/14/11
GDP Growth Rate	Year IIQ2011 ∆%: 9.6 Quarter IIQ2011 ∆%: 2.2 Blog 08/14/11
Investment in Fixed Assets	Jan-Jul ∆%: 25.4 Blog 08/14/11
Retail Sales	Jul month ∆%: 1.3 Jul 12 month ∆%: 17.2 Blog 08/14/11
Trade Balance	Jul $31.5 billion Exports ∆% 20.4 Imports ∆% 22.9 Jan-Jul $76.2 billion Exports ∆% 23.4 Import ∆% 26.9 Blog 08/14/11

Links to blog comments in Table CNY:

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

VID Euro Area. The Markit Eurozone Manufacturing PMI^® reached a two-year low level with new orders falling in all surveyed countries (http://www.markit.com/assets/en/docs/commentary/markit-economics/2011/sep/EZ_Manufacturing_ENG_1109_PR.pdf). The index declined from 50.4 in Jul to 49.0 in Aug, which is the lowest registered since Aug 2009. In the first time in two years, output declined throughout the euro zone economy. The decline in new orders has occurred over three consecutive months at the fastest rate in 26 months. Demand has weakened both from domestic markets and export markets. The manufacturing recovery of the euro zone appears to be compromised.

Table EUR provides the regional data for the euro zone. The data are similar for most advanced economies. GDP grew only 0.2 percent in IIQ2011. The rate of unemployment has stabilized at 10.0 percent and the number unemployed at around 15.7 million. Domestic demand is weak and now export demand is weakening.

Table EUR, Euro Area Economic Indicators

GDP	IIQ2011 ∆% 0.2; IIQ2011/IIQ2010 ∆% 1.7 Blog 08/21/11
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	Jun month ∆%: 0.9 Jun 12 months ∆%: –0.4 Blog 08/07/11
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

The sharp decline in the economic sentiment index of the euro area in Table 36 from 107.0 in Dec 2010 to 98.3 in Aug 2011 shocked financial markets. The confidence index fell from negative 11.0 in Dec 2010 to negative 16.5 in Aug 2011. The excellent chart by Eurostat since 1990 shows high association of the economic sentiment indicator with the economic cycle and vertical drop in 2011 (http://ec.europa.eu/economy_finance/db_indicators/surveys/index_en.htm).

Table 36, Euro Area, Indicators of Confidence and Economic Sentiment SA

	ESI	IND	SERV	CON	RET	CONS
Aug 2011	98.3	-2.9	3.7	-16.5	-8.7	-23.3
Jul	103.0	0.9	7.9	-11.2	-3.6	-24.3
Jun	105.4	3.5	10.1	-9.7	-2.6	-23.5
May	105.5	3.8	9.3	-9.9	-2.4	-24.7
Apr	106.1	5.6	10.3	-11.6	-1.8	-24.3
Mar	107.3	6.6	10.8	10.6	-1.4	-25.4
Feb	108.0	6.7	11.2	-10.0	-0.2	-24.2
Jan	106.8	6.2	9.9	-11.2	-0.6	-26.0
Dec 2010	107.0	5.3	9.8	-11.0	4.3	-26.7

ESI: Economic Sentiment Index; IND: Industry; SERV: Services; CON: Consumer; RET: Retail Trade; CONS: Construction

Source: http://ec.europa.eu/economy_finance/db_indicators/surveys/documents/2011/bcs_2011_08_en.pdf

The euro area unemployment rate and number of unemployed are provided in Table 37. The unemployment rate has remained at around 10.0 percent, which was the rate in Jul 2011, and the number unemployed has also stabilized at around 15.7 million.

Table 37, Euro Area, Unemployment Rate and Number of Unemployed, % and Millions

	Unemployment Rate %	Number Unemployed Millions
Jul 2011	10.0	15.757
Jun	10.0	15.696
May	10.0	15.672
Apr	9.9	15.608
Mar	10.0	15.653
Feb	10.0	15.665
Jan	10.0	15.704
Jul 2010	10.2	16.004

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/3-31082011-BP/EN/3-31082011-BP-EN.PDF

Table 38 provides a perspective of HICP inflation, rate of unemployment and GDP growth of the euro area from 1999 to 2011. The rate of unemployment declined to a low of 7.6 percent in 2007 but rose to 10.1 percent in 2010 and is now at around 10.0 percent in 2011. HICP inflation rose above 2 percent in 2000 and was lower only at 0.3 percent in 2009 and 1.6 percent in 2010. GDP growth has oscillated with strength at 3.1 percent in 2006 and 2.8 percent in 2008. Recovery is now facing weak internal demand and global growth slowdown.

Table 38, Euro Area, HICP, Rate of Unemployment and GDP

	Harmonized Index of Consumer Prices ∆%	Rate of Unemployment %	GDP ∆%
2011	2.5	10.0	1.6*
2010	1.6	10.1	1.8
2009	0.3	9.6	-4.1
2008	3.3	7.6	0.4
2007	2.1	7.6	2.8
2006	2.2	8.5	3.1
2005	2.2	9.2	1.7
2004	2.2	9.0	2.2
2003	2.1	8.9	0.8
2002	2.3	8.5	0.9
2001	2.4	8.1	1.9
2000	2.2	8.5
1999	1.2	9.4

*EUROSTAT Forecast; HICP and Rate of Unemployment for Jul 2011

Source: http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database

VIE Germany. The Markit/BME Germany Manufacturing PMI^® fell from 52.0 in Jul to 50.9 in Aug, registering the lowest value since Sep 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8459). The index has fallen in five of the past six months after reaching a peak in Feb. Output growth in Aug was the slowest since Jul 2009. New business contracted at the fastest rate since Jun 2009. New foreign business contracted at the fastest rate in more than two years. New export orders fell at the fastest rate in about two years.

Table DE provides the data table for Germany. This subsection considers in greater detail the newly available revision of the national accounts of Germany. Aggregate indicators suggest growth but not at the high rate in 2010 and IQ2011.

Table DE, Germany, Economic Indicators

GDP	IIQ2011 0.1 ∆%; II/Q2011/IIQ2010 ∆% 2.7 Blog 09/04/11
Consumer Price Index	Aug month SA ∆%: minus 0.1 Aug 12 months ∆%: 2.3 Blog 09/04/11
Producer Price Index	Jun month ∆%: 0.7 12 months NSA ∆%: 5.8 Blog 08/21/11
Industrial Production	Jun month SA ∆%: –0.9 12 months NSA: 0.9 Blog 08/07/11
Machine Orders	Jun month ∆%: 1.8 Jun 12 months ∆%: 3.0 Blog 08/07/11
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	Trade Balance NSA Jun €6.0 billion versus May €15.6 billion Exports Jun 12 month NSA ∆%: 3.1 (versus ∆% 19.9 May) Imports Jun 12 months NSA ∆%: 6.0 (versus ∆% 15.6 May) Exports Jun month SA ∆%: -1.2; Imports Jun month SA ∆%: 0.3 Blog 08/14/11

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 report on employment accounts of Germany is provided in Table 39. The NSA million of people employed in Germany whose place of residency in is Germany was 41.024 million in Jul 2011, growing by 1.4 percent relative to a year earlier. The SA number has been growing at a rate of around 0.1 percent from Feb to Jul 2011.

Table 39, Germany, People Employed, whose Place of Residence is in Germany, Employment Accounts

	# Employed NSA Millions	∆% 12 months	# Employed SA Millions	∆% Month/ Prior Month
Jul 2011	41.024	1.4	41.096	0.1
Jun	41.025	1.4	41.063	0.1
May	40.974	1.4	41.015	0.1
Apr	40.876	1.4	40.976	0.1
Mar	40.691	1.5	40.924	0.1
Feb	40.548	1.5	40.864	0.1
Jan	40.521	1.4	40.820	0.2
Dec 2010	40.891	1.1	40.745	0.1
Dec 2009	40.447	-0.5	40.302	0.0
Jan 2009	40.111	-1.0	40.403	0.1

“Results of employment accounts as part of national accounting: persons in employment whose place of residence is in Germany (resident concept).”

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/08/PE11__311__132,templateId=renderPrint.psml

Data for the labor force survey of Germany are in Table 40. In Jul 2011 there were 2.58 million unemployed, increasing by 0.4 percent from Jun 2011 but declining by 10.4 percent relative to Jul 2010. The rate of unemployment in this report was 6.2 percent NSA for Jul 2011. The rate of unemployment SA stood at 6.1 percent in Jul 2011. The number of persons in employment in Jul 2011 NSA was 39.33 million, growing by 2.3 percent relative to Jul 2010.

Table 40, Germany, Unemployment Labor Force Survey

	Jul 2011	Jun 2011	Jul 2010
NSA
Number Unemployed Millions	2.58 ∆% Jun 2011: 0.4 ∆% Jul 2010: –10.4	2.57	2.88
% Rate Unemployed	6.2	6.1	7.0
Persons in Employment	39.33 ∆% Jun 2011: –0.5 ∆% Jul 2010: 2.3	39.51	38.46
Employment Rate	62.2	62.6	61.0
SA
Number Unemployed Millions	2.56 ∆% Jun 2011: –0.8 ∆% Jul 2010: –12.3	2.58	2.92
% Rate Unemployed	6.1	6.1	7.0
Persons in Employment	39.64 ∆% Jun 2011: 0.3 ∆% Jul 2010: 2.5	39.54	38.68

NSA: not seasonally adjusted; SA: seasonally adjusted

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/08/PE11__311__132,templateId=renderPrint.psml

Retail sales in Germany are shown in Table 41. There is weakness in demand across most advanced economies. The monthly rates of growth of retail sales are quite weak except for the jump in Jun. In Jul, the monthly rate of growth was 0.0 percent and sales were lower by 1.6 percent relative to a year earlier. The yearly data in the second block of Table 41 also shows weakness before the crisis with decline of 1.2 percent in 2007 and in the recovery with growth of 1.4 percent.

Table 41, Retail Sales in Germany Adjusted for Inflation

	Month ∆%	12 Months ∆%
Jul 2011	0.0	-1.6
Jun	4.5	-2.1
May	-1.7	4.1
Apr	0.1	4.6
Mar	-0.9	-2.6
Feb	-0.4	2.3
Jan	1.5	2.9
Dec 2010	0.5	0.2
Year ∆%
2010		1.4
2009		-3.2
2008		0.0
2007		-1.2

Source: Federal Statistical Office September 2011 http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/DE/Presse/pm/2011/08/PD11__312__45212,templateId=renderPrint.psml

The disappointment with German GDP is the low rate of growth of 0.1 percent in IIQ2011 relative to IQ2011, shown in Table 42. Recovery was quite strong in IIQ2010 with growth of 1.9 percent, in IIIQ2010 with growth of 0.8 percent and in IQ2011 with 1.3 percent.

Table 42, Germany Quarter GDP ∆% Relative to Prior Quarter

	IQ	IIQ	IIIQ	IV
2011	1.3	0.1
2010	0.5	1.9	0.8	0.5
2009	-4.0	0.3	0.8	0.7
2008	1.1	-0.4	-0.4	-2.2
2007	0.7	0.6	0.9	0.3

Seasonal and calendar adjusted

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/DE/Content/Publikationen/Fachveroeffentlichungen/VolkswirtschaftlicheGesamtrechnungen/Inlandsprodukt/NationalAccountsQuarterlyResults6480120113225,templateId=renderPrint.psml

Growth in a quarter relative to the same quarter a year earlier shows stronger in Table 43. IIQ2011 growth relative to IIQ2010 was 4.0 percent. The growth rate of 4.7 percent in IQ2011 provided optimism about the expansion of the German economy. Growth rates in 2007 were quite strong.

Table 43, Germany, Quarter GDP ∆% Relative to Same Quarter a Year Earlier, Calendar and Price Adjusted NSA

	IQ	IIQ	IIIQ	IV
2011	4.7	2.7
2010	2.5	4.0	4.0	3.7
2009	-6.7	-6.2	-5.1	-2.3
2008	2.9	1.8	0.5	-1.9
2007	4.5	3.4	3.4	2.3

Calendar and price adjusted NSA

The yearly rate of growth of German GPD is provided in Table 44 from 1992 to 2010. The data have been revised thoroughly. The restructuring of the economy of Germany began to provide excellent results with growth of 3.9 percent in 2006, calendar adjusted, and 3.4 percent in 2007. Germany rebounded from the drop of GDP by 5.1 percent in 2009 followed by growth of 3.6 percent in 2010.

Table 44, Germany, GDP Year ∆%

	Unadjusted	Calendar Adjusted
2010	3.7	3.6
2009	-5.1	-5.1
2008	1.1	0.8
2007	3.3	3.4
2006	3.7	3.9
2005	0.7	0.8
2004	1.2	0.7
2003	-0.4	-0.4
2002	0.0	0.0
2001	1.5	1.6
2000	3.1	3.3
1999	1.9	1.8
1998	1.9	1.7
1997	1.7	1.8
1996	0.8	0.8
1995	1.7	1.8
1994	2.5	2.5
1993	-1.0	-1.0
1992	1.9	1.5

Percentage point contributions of the use of GDP in Germany are shown in Table 45. The weak result in IIQ2011 was driven by negative contribution of 0.4 percentage points by household consumption and negative contribution of 0.3 percentage points by net exports. A factor of negative net exports was the elimination of exports of electricity and increased imports in the shift away from nuclear production. Gross capital formation contributed 0.8 percentage points to growth in IQ2011 and 0.7 percentage points in IIQ2011.

Table 45, Germany, Percentage Point Contributions of Use of Gross Domestic Product, Calendar and SA

	IVQ2010	IQ2011	IIQ2011
Consumption Total	0.3	0.3	-0.3
Households Consumption	0.3	0.2	-0.4
Government Consumption	0.0	0.0	0.0
Gross Capital Formation	0.2	0.8	0.7
Gross Fixed Capital Formation (GFCF)	0.0	0.8	0.0
CFCF including Machinery & Equipment	0.2	0.1	0.1
CFCF including Construction	-0.2	0.7	-0.1
Change in Inventories	0.2	0.0	0.7
Domestic Uses	0.5	1.0	0.3
Net Exports	0.0	0.3	-0.3

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/09/PE11__314__811,templateId=renderPrint.psml

Table 46 provides the percentage change relative to a year earlier of use of GDP in Germany. Year on year growth rates are quite strong across all segments. The rate of growth of exports and imports decelerated sharply in IIQ2011.

Table 46, Germany, Percentage Change on Earlier Year of Use of Gross Domestic Product, Price Adjusted NSA

	2010	IQ2011	IIQ2011
Consumption Total	0.9	1.6	1.3
Households Consumption	0.6	1.9	1.4
Government Consumption	1.7	0.6	1.3
Gross Capital Formation	9.5	12.4	6.7
Gross Fixed Capital Formation (GFCF)	5.5	13.9	6.1
CFCF including Machinery & Equipment	10.5	16.5	11.6
CFCF including Construction	2.2	13.2	2.4
Domestic Uses	2.4	3.6	2.3
Exports	13.7	13.3	7.7
Imports	11.7	11.0	7.3
GDP	3.7	5.0	2.8
GDP per Worker	3.2	3.5	1.4
GDP per Hour Worked	1.4	2.3	1.2

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/09/PE11__314__811,templateId=renderPrint.psml

Percentage changes from year earlier of gross value added by economic sectors are shown for Germany in Table 47. The two rows of industry ex construction and industry including manufacturing reveal sharp reductions in yearly growth rates from IQ2011 to IIQ2011.

Table 47, Germany, Percentage Change from Year Earlier of Gross Value Added by Economic Sector, Price Adjusted NSA

	2010	IQ2011	IIQ2011
Agriculture	20.5	1.2	1,3
Industry ex Construction	9.8	11.0	6.4
Industry including Mfg	11.3	14.1	9.4
Construction	1.7	10.1	2.1
Trade, Transport	3.8	6.3	4.5
Information & Comm.	5.0	1.7	2.1
Finance & Insurance	-0.1	-0.1	-1.6
Real Estate	0.2	0.0	0.8
Business Services	3.8	4.4	3.9
Public Services, Education & Health	1.6	0.3	0.7
Other Services	1.2	-0.3	-0.8
Total Gross Value Added	4.1	4.5	3.0

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/09/PE11__314__811,templateId=renderPrint.psml

VIF France. The Markit France Manufacturing PMI^® fell from 50.5 in Jul to 49.1 in Aug (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8496). The decline in output of manufacturing in France in Aug was the first since Jun 2009 as well as the deepest in 27 months. The fall in new business was the primary cause of the drop in manufacturing output. New orders fell at the fastest rate since May 2009. Domestic and foreign demand weakened in Aug.

Table FR provides the data table for France. The French economy is slowing together with most advanced economies.

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	Jun/May SA ∆%: Industrial Production -1.6; Manufacturing –1.9 Jun 12 months NSA ∆%: Industrial Production 2.1; Manufacturing 3.8 Blog 08/14/11
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

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

The number of unemployed in France rose from 2.079 million in IV2007, for a rate of unemployment of 7.2 percent, to 2.580 million in IIQ2011, for a rate of unemployment of 9.1 percent, as shown in Table 48. At the same time, the rate of employment fell from 64.4 percent in IV2007 to 63.9 percent in IIQ2011.

Table 48, France Unemployed and Unemployment Rate, Millions and %

	Unemployed Millions	Unemployed Percent	Employ -ment Rate
IIQ2011	2.580	9.1	63.9
IQ2011	2.617	9.2	63.8
IVQ2010	2.629	9.2	63.7
IIIQ2010	2.648	9.3	63.9
IIQ2010	2.647	9.3	63.9
IQ2010	2.688	9.5	63.9
IVQ2009	2.700	9.6	63.7
IIIQ2009	2.594	9.2	63.9
IIQ2009	2,606	9.2	64.2
IQ2009	2.429	8.6	64.4
IVQ2008	2.172	7.7	64.8
IIIQ2008	2.068	7.4	64.8
IIQ2008	2.031	7.3	64.8
IQ2008	1.996	7.2	64.9
IV2007	2.079	7.5	64.6
IIIQ2007	2.225	8.0	64.4
IIQ2007	2.257	8.1	64.1

Source: http://www.insee.fr/en/themes/info-rapide.asp?id=14&date=20110901

VIG Italy. The Markit/ADACI Italy Manufacturing PMI^® declined from 50.1 in Jul to 47.0 in Aug with production of manufacturers in Italy registering the first fall since Sep 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8463). The decline of production originated in weak demand at home and abroad. New business for Italian manufacturers fell in Aug for the third consecutive month.

Table IT provides the data table for Italy. The economy is weak with GDP growing at 0.8 percent in IIQ2011 relative to IIQ2010. Industrial production in Jun was lower by 0.6 percent than a year earlier. Retail sales were lower in Jun by 1.2 than 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 08/07/11
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

Italy’s retail sales have declined in the two first quarters of 2011 relative to the prior quarter, as shown in Table 49. Total sales also dropped by 1.2 percent in Jun 2011 relative to Jun 2010.

Table 49, Italy, Retail Sales ∆%

	Jun 2011/ May 2011 SA	Apr-Jun 11/ Jan-Mar 11 SA	Jun 2011/ Jun 2010 NSA
Total	-0.2	-0.1	-1.2
Food	0.0	0.4	0.0
Non-food	-0.3	-0.2	-1.8

Source: http://www.istat.it/en/archive/37070 http://www.istat.it/it/archivio/36712

Italy is experiencing the same conditions of weak internal demand found in advanced economies. Table 50 provides Italy’s retail sales growth in 12 months. Retail sales are mostly negative in 12 months in the first half of 2011.

Table 50, Italy, Retail Sales 12 Months ∆%

	12 Months ∆%
Jun 2011	-1.2
May	-0.4
Apr	2.2
Mar	-2.1
Feb	0.0
Jan	-1.1
Dec 2010	0.6
2010	0.2
2009	-1.7
2008	-0.3

Source: http://www.istat.it/it/archivio/36712

Italy’s business confidence indexes in manufacturing and construction are provided in Table 51. Business confidence deteriorated from 102.6 in Apr to 99.9 in Aug. Production expectations fell sharply from 12 in Apr to 7 in Aug. Confidence in construction peaked at 80.5 in June, declining to 75.8 in Jul.

Table 51, Italy, Index of Business Confidence in Manufacturing and Construction 2005=100

	Aug	Jul	May	Jun	Apr
Mfg Con-fidence	99.9	98.8	100.7	101.2	102.6
Order Books	-20	-24	-20	-20	-19
Stocks Finished Products	2	2	2	0	0
Produc- tion Expecta-tion	7	8	10	10	12
Construction Con-fidence		75.8	74.4	80.5	73.1
Order Books		-54	-54	-49	-56
Employ-ment		-19	-22	-16	-21

Mfg: manufacturing

Source: http://www.istat.it/en/archive/37100

Italy’s index of consumer confidence in Table 52 fell from 103.7 in Apr to 100.3 in Aug. Confidence in the economy fell from 72.8 in Apr to 70.0 in Aug.

Table 52, Italy, Index of Consumer Confidence 1980=100

	Aug	Jul	Jun	May	Apr
Con-fidence	100.3	103.7	105.7	106.4	103.7
Economy	70.0	74.9	78.2	77.6	72.8
Personal	116.2	118.8	120.1	121.5	118.8
Current	112.8	116.5	115.4	116.7	114.3
Future	87.5	87.8	93.6	93.1	90.1

Source: http://www.istat.it/en/archive/36950

Data on Italy’s labor market since 2004 are provided in Table 53. The unemployment rate has risen from 6.2 in Dec 2006 to 8.0 in Jul 2011. As in other advanced economies, unemployment has stabilized at high levels.

Table 53, Italy, Labor Report

	Participation Rate %	Employment Ratio %	Unemploy -ment Rate %
Jul 2011	62.0	56.9	8.0
Jun	61.9	56.9	8.0
May	62.0	56.9	8.1
Apr	61.8	56.8	8.0
Mar	62.1	57.0	8.1
Feb	61.9	56.8	8.1
Jan	62.0	56.8	8.2
Dec 2010	62.0	56.9	8.2
Dec 2009	62.3	57.0	8.3
Dec 2008	62.6	58.2	6.9
Dec 2007	63.2	59.0	6.7
Dec 2006	62.5	58.5	6.2
Dec 2005	62.6	57.8	7.5
Dec 2004	62.5	57.5	7.9

Source: http://www.istat.it/it/archivio/37179

VIH UK. The Markit/CIPS Manufacturing PMI registered the lowest level in 26 months at 49.0 in Aug below 49.5 in Jul (http://www.markit.com/assets/en/docs/commentary/markit-economics/2011/sep/UK_manufacturing_11_09_01.pdf)The index has lost 12 points since the peak in Jan, which has occurred only once excluding the period after the bankruptcy of Lehman in the 20 years of history of the index. In the UK, as almost elsewhere, manufacturers have suffered weak internal demand as well as weak foreign demand. Export orders fell at the fastest rate in five years.

Table UK provides the data table for the United Kingdom. Inflation remains at a relatively high level of 4.4 percent in 12 months for the CPI and 5.9 percent for output prices. GDP growth in IIQ2011 was 0.2 relative to IQ2011 and 0.7 relative to IIQ2010. Manufacturing fell 0.4 percent in Jun and industrial production was flat. Retail sales were flat in 12 months ending in Jul.

Table UK, UK Economic Indicators


CPI	Jul month ∆%: 0.0 Jun 12 months ∆%: 4.4 Blog 08/21/11
Output/Input Prices	Output Prices: Jul 12 months NSA ∆%: 5.9; excluding food, petroleum ∆%: 3.3 Input Prices: Jul 12 months NSA ∆%: 18.5 Excluding ∆%: 13.1 Blog 08/07/11
GDP Growth	IIQ2011 prior quarter ∆% 02; year earlier same quarter ∆%: 0.7 Blog 08/28/11
Industrial Production	Jun 2011/Jun 2010 NSA ∆%: Industrial Production -0.3; Manufacturing 2.1 Jun 2011/May 2011 SA ∆%: Industrial Production 0.0; Manufacturing -0.4 Blog 08/14/11
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

VII Spain. The Markit Purchasing Managers’ Index^® for Spain dropped deeper into contraction territory from 45.6 in Jul to 45.3 in Aug (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8504). Manufacturing output contracted at the fastest rate registered since Jun 2009. New orders fell sharply and new export orders also fell but less rapidly.

Table 54 shows the struggle of Spain to emerge out of recession. Deep contractions of GDP in the quarter relative to the same quarter a year earlier were experienced in 2009. Recovery has occurred at rising rates from 0.0 percent in IIQ2010, peaking at 0.9 percent in IQ2011 and registering 0.7 percent in IIQ2011. These rates are insufficient to dent a rate of unemployment in excess of 20 percent.

Table 54, Spain, Growth of GDP Quarter on Same Quarter a Year Earlier and Prior Quarter ∆%

	Quarter on Same Quarter a Year Earlier ∆%
IIQ2011	0.7
IQ2011	0.9
IVQ2010	0.6
IIIQ2010	0.2
IIQ2010	0.0
IQ2010	-1.4
IVQ2009	-3.0
IIIQ2009	-3.9
IIQ2009	-4.4
IQ2009	-3.5
IVQ2008	-1.1
IIIQ2008	0.8
IIQ2008	1.7
IQ2008	2.0

Source: http://www.ine.es/jaxi/menu.do?type=pcaxis&path=%2Ft35%2Fp009&file=inebase&L=1

The structure of GDP growth by sectors is shown in Table 55. Household consumption fell 0.2 percent in IIQ2011. Gross fixed capital formation (CFCF) has been falling at rates in excess of 6 percent. CFCF in construction has fallen at rates in excess of 10 percent as Spain also experienced excess construction in the prior expansion. Exports and imports also show deceleration as in other advanced economies. National demand is growing at negative rates.

Table 55, Spain, Year on Year Growth Rates Chained-Linked Volumes

	IVQ2010	IQ2011	IIQ2011
GDP	0.6	0.9	0.7
Household Consumption	1.7	0.7	-0.2
Government Consumption	-0.9	2.6	-1.0
Gross Fixed Capital Formation (GFCF)	-6.1	-6.0	-6.7
CFCF Equipment	1.2	0.3	-3.7
CFCF Construction	-10.6	-10.4	-9.3
CFCF Other	-1.5	-0.4	-2.7
Changes in Inventories*	0.1	0.0	-0.1
National Demand*	-0.6	-0.4	-1.9
Exports	10.5	12.1	8.4
Imports	5.3	6.3	-1.7

*Contribution to GDP growth

Sources: http://www.ine.es/jaxi/menu.do?type=pcaxis&path=%2Ft35%2Fp009&file=inebase&L=1

VII 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 56 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 56 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 19.2 percent by Fri Sep 2, 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 56 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 56, 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	09/02 /2011
Rate	1.1423	1.5914	1.192	1.4206
CNY/USD	01/03 2000	07/21 2005	7/15 2008	09/02 2011
Rate	8.2798	8.2765	6.8211	6.3815
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 57 extracts four rows of Table 56 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 59 below, the dollar has devalued again to USD 1.4206/EUR or by 19.2 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 6.3815/USD on Fri Sep 2, 2011, or by an additional 6.4 percent, for cumulative revaluation of 19.2 percent.

Table 57, 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	09/02 /2011
Rate	1.1423	1.5914	1.192	1.4206
CNY/USD	01/03 2000	07/21 2005	7/15 2008	09/02 2011
Rate	8.2798	8.2765	6.8211	6.3815

Source: Table 56.

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 58. 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 58, 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 56 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 59, 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 09/02/11,” which has been recently stalling or reversing amidst profound risk aversion. Recovering risk financial assets are in the range from 1.4 percent for the Nikkei Average and 31.1 percent for the DJ UBS Commodity Index. The carry trade from zero interest rate 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 09/02/11” 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 4.1 percent below the trough on Jul 2, 2010; the NYSE Financial Index is 2.3 percent below the trough on Jul 2, 2010; Germany DAX index is 2.3 percent below; and Japan’s Nikkei is only 1.4 percent above the trough on Aug 31, 2010 and 21.4 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 8950.74 on Fri Sep 2, which is 14.6 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 19.2 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 09/02/2011” shows mixed performance of financial assets led by gains of 3.2 percent for the DJ Asia Pacific because Asian markets were closed when the US employment situation report was released at 8:30 PM New York time on Fri Sep 2. 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 59 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 9/02/11” but also relative to the peak in column “∆% Peak to 9/02/11.” Only two indexes are now above the peak, DJ UBS Commodity Index by 12.1 percent and DJIA by 0.3 percent. There are several indexes well below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 23.8 percent, Nikkei Average by 21.4 percent, Shanghai Composite by 20.1 percent, STOXX 50 by 18.8 percent and Dow Global by 10.9 percent. S&P 500 is lower relative to the peak by 3.6 percent and DJ Asia Pacific is lower by 2.1 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 59, Stock Indexes, Commodities, Dollar and 10-Year Treasury

	Peak	Trough	∆% to Trough	∆% Peak to 9/ 02/11	∆% Week 9/ 02/11	∆% Trough to 9/ 02/11
DJIA	4/26/ 10	7/2/10	-13.6	0.3	-0.4	16.0
S&P 500	4/23/ 10	7/20/ 10	-16.0	-3.6	-0.2	14.8
NYSE Finance	4/15/ 10	7/2/10	-20.3	-23.8	-0.6	-4.3
Dow Global	4/15/ 10	7/2/10	-18.4	-10.9	1.1	9.1
Asia Pacific	4/15/ 10	7/2/10	-12.5	-2.1	3.2	11.8
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-21.4	1.7	1.4
China Shang.	4/15/ 10	7/02 /10	-24.7	-20.1	-3.2	6.1
STOXX 50	4/15/10	7/2/10	-15.3	-18.8	2.9	-4.1
DAX	4/26/ 10	5/25/ 10	-10.5	-12.5	0.0	-2.3
Dollar Euro	11/25 2009	6/7 2010	21.2	6.1	2.0	-19.2
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	12.1	0.9	31.1
10-Year Tre.	4/5/ 10	4/6/10	3.986	1.992

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 60 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 60 for Sep 2 shows that the S&P 500 is now 3.1 percent below the Apr 26, 2010 level and the DJIA is only 0.3 percent above 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 60, Percentage Changes of DJIA and S&P 500 in Selected Dates

2010	∆% DJIA from earlier date	∆% DJIA from Apr 26	∆% S&P 500 from earlier date	∆% S&P 500 from Apr 26
Apr 26
May 6	-6.1	-6.1	-6.9	-6.9
May 26	-5.2	-10.9	-5.4	-11.9
Jun 8	-1.2	-11.3	2.1	-12.4
Jul 2	-2.6	-13.6	-3.8	-15.7
Aug 9	10.5	-4.3	10.3	-7.0
Aug 31	-6.4	-10.6	-6.9	-13.4
Nov 5	14.2	2.1	16.8	1.0
Nov 30	-3.8	-3.8	-3.7	-2.6
Dec 17	4.4	2.5	5.3	2.6
Dec 23	0.7	3.3	1.0	3.7
Dec 31	0.03	3.3	0.07	3.8
Jan 7	0.8	4.2	1.1	4.9
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

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

Table 61, 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 61, Exchange Rates

	Peak	Trough	∆% P/T	Sep 02, 2011	∆T Sep 02 2011	∆P Sep 02 2011
EUR USD	7/15 2008	6/7 2010		9/02 2011
Rate	1.59	1.192		1.4206
∆%			-33.4		16.1	11.9
JPY USD	8/18 2008	9/15 2010		9/02 2011
Rate	110.19	83.07		76.79
∆%			24.6		7.6	30.3
CHF USD	11/21 2008	12/8 2009		9/02 2011
Rate	1.225	1.025		0.783
∆%			16.3		23.6	36.1
USD GBP	7/15 2008	1/2/ 2009		9/02 2011
Rate	2.006	1.388		1.622
∆%			-44.5		14.4	-23.7
USD AUD	7/15 2008	10/27 2008		9/02 2011
Rate	1.0215	1.6639		1.064
∆%			-62.9		43.5	7.9
ZAR USD	10/22 2008	8/15 2010		9/02 2011
Rate	11.578	7.238		7.07
∆%			37.5		2.3	38.9
SGD USD	3/3 2009	8/9 2010		9/02 2011
Rate	1.553	1.348		1.203
∆%			13.2		10.8	22.6
HKD USD	8/15 2008	12/14 2009		9/02 2011
Rate	7.813	7.752		7.788
∆%			0.8		-0.5	0.3
BRL USD	12/5 2008	4/30 2010		9/02 2011
Rate	2.43	1.737		1.643
∆%			28.5		5.4	32.4
CZK USD	2/13 2009	8/6 2010		9/02 2011
Rate	22.19	18.693		17.162
∆%			15.7		8.2	22.7
SEK USD	3/4 2009	8/9 2010		9/02 2011
Rate	9.313	7.108		6.383
∆%			23.7		10.2	31.5
CNY USD	7/20 2005	7/15 2008		9/02 2011
Rate	8.2765	6.8211		6.3815
∆%			17.6		6.4	22.9

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 62, 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 an the world. The yield of 1.992 percent percent at the close of market on Fr Aug 26, 2011, just shy four basis points from a record, would be equivalent to price of 105.7137 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 4.4 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 62 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 Aug 31, 2011, the line “Reserve Bank credit” in the Fed balance sheet stood at $2838 billion, or $2.8 trillion, with portfolio of long-term securities of $2619 billion, or $2.6 trillion, consisting of $1557 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 $1589 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 62, 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

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

VIII Economic Indicators. Crude oil input in refineries fell to 15,538 thousand barrels per day on average in the four weeks ending on Aug 26 from 15,549 thousand barrels per day in the four weeks ending on Aug 19, as shown in Table 63. The rate of capacity utilization in refineries continues at a high level close to 90 percent. Imports of crude oil rose from 9,047 thousand barrels per day on average to 9,165 thousand barrels per day. Increasing utilization but with increasing imports resulted in increase of commercial crude oil stocks by 5.3 million barrels from 351.8 million on Aug 19 to 357.1 million on Aug 26. Gasoline stocks fell 2.8 million barrels and stocks of fuel oil increased 0.4 million barrels. The most worrisome fact is that supply of gasoline fell from 9,608 thousand barrels per day on Aug 27, 2010, to 9,165 thousand barrels per day on Aug 26, 2011, or by 2.1 percent, while fuel oil supply rose 5.5 percent. Part of the fall in consumption of gasoline is due to higher prices and part to the growth recession. Table 63 also shows increase in the world oil price by 48.6 percent from Aug 27, 2010 to Aug 26, 2011. Gasoline prices rose by 35.2 percent from Aug 30, 2010 to Aug 29, 2011.

Table 63, US, Energy Information Administration Weekly Petroleum Status Report

Four Weeks Ending Thousand Barrels/Day	08/26/11	08/19/11	08/27/10
Crude Oil Refineries Input	15,538	15,549	15,004
Refinery Capacity Utilization %	89.6	89.7	88.2
Motor Gasoline Production	9,446	9,336	9,415
Distillate Fuel Oil Production	4,615	4,595	4,321
Crude Oil Imports	9,165	9,047	9,608
Motor Gasoline Supplied	9,169 ∆% 2011/2010= –2.1%	9,166	9,364
Distillate Fuel Oil Supplied	3,859 ∆% 2011/2010 = 5.5%	3,837	3,657
	08/26/11	08/19/11	08/27/10
Crude Oil Stocks Million B	357.1 ∆= 5.3 MB	351.8	361.7
Motor Gasoline Million B	208.6 ∆= –2.8 MB	211.4	225.4
Distillate Fuel Oil Million B	156.1 ∆= 0.4 MB	155.7	175.2
World Crude Oil Price $/B	105.90 ∆% 2011/2010 48.6	105.57	71.28
	08/29/11	08/22/11	08/30/10
Regular Motor Gasoline $/G	3.627 ∆% 2011/2010 35.2	3.581	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

Initial claims for unemployment insurance seasonally adjusted fell 12,000 to reach 409,000 in the week of Aug 27 from 421,000 in the week of Aug 20, as shown in Table 64. Claims not seasonally adjusted, or the actual estimate, fell 10.498 to reach 334,372 in the week of Aug 27 from 344,870 in the week of Aug 20.

Table 64, US, Initial Claims for Unemployment Insurance

	SA	NSA	4-week MA SA
Aug 27	409,000	334,372	410,250
Aug 20	421,000	344,870	408,500
Change	-12,000	-10,498	+1,750
Aug 13	412,000	346,014	403,500
Prior Year	468,000	383,135	475,750

Note: SA: seasonally adjusted; NSA: not seasonally adjusted; MA: moving average

Source: http://www.dol.gov/opa/media/press/eta/ui/current.htm

IX Interest Rates. It is quite difficult to measure inflationary expectations because they tend to break abruptly from past inflation. There could still be an influence of past and current inflation in the calculation of future inflation by economic agents. Table 65 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 -0.02 percent for three months or zero, 0.05 percent for six months, 0.10 percent for 12 months, 0.20 percent for two years, 0.31 percent for three years, 0.86 percent for five years, 1.39 percent for seven years, 1.99 percent for ten years and 3.30 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 65. 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 65, 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. 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

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

Cole, Harold L. and Lee E. Ohanian. 1999. The Great Depression in the United States from a neoclassical perspective. Federal Reserve Bank of Minneapolis Quarterly Review 23 (1, Winter): 2-24.

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

Council of the European Union. 2011Jul21. Statement by the heads of state or government of the euro area and EU institutions. Brussels, CEU, Jul 21 http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/123978.pdf

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.

Darby, Michael R. Darby. 1974. The permanent income theory of consumption—a restatement. Quarterly Journal of Economics (88, 2): 228-50.

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.

Duffie, Darell and Kenneth J. Singleton. 2003. Credit risk: pricing, measurement and management. Princeton: Princeton University Press.

Friedman, Milton. 1957. A Theory of the Consumption Function. Princeton: Princeton University Press.

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

Feldstein, Martin. 2011Jul25. Forget the debt: its jobs that will define Obama’s future. Financial Times, Jul 25 http://blogs.ft.com/the-a-list/2011/07/25/obama-must-focus-on-jobs-not-just-debt-ceiling/#axzz1T9xemoL8

Margo, Robert A. 1993. Employment and unemployment in the 1930s. Journal of Economic Perspectives 7 (2, Sep): 41-59.

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.

Merton, Robert C. 1974. On the pricing of corporate debt: the risk structure of interest rates. Journal of Finance 29 (2, May): 449-70.

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

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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

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Monday, September 5, 2011

Global Growth Standstill Recession, Stalled Job Creation with 30 Million in Job Stress, Falling Real Wages, Stagnant Incomes and International Financial Turbulence

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