CMP Associates Regulation Blog: Prosperity without Inflation, World Financial Turbulence and Global Slowdown

Carlos M. Pelaez

Executive Summary

I Monetary Policy of Prosperity without Inflation

IA Prosperity and Inflation

IA1 Theory and Policy of Central Banking

IA2 US Inflation

IB Appendix Great Inflation and Unemployment Analysis

IB1 “New Economics” and the Great Inflation

IB2 Counterfactual with Current Science

IB3 Policy Rule and Politics

IB4 Supply Shocks

IB5 Conclusion

II World Financial Turbulence

III Global Inflation

IV World Economic Slowdown

IVA United States

IVB Japan

IVC China

IVD Euro Area

IVE Germany

IVF France

IVG Italy

IVH United Kingdom

V Valuation of Risk Financial Assets

VI Economic Indicators

VII Interest Rates

VII Conclusion

References

Appendix I The Great Inflation

Executive Summary

Short-term indicators of economies accounting for some three-quarters of world output are followed in this blog. The purchasing managers’ indexes are more current and integrated providing the best available world view. Data for the United States released in the week of Oct 21 are more encouraging. There are five conclusions based on the overall information.

1. Recession. There appears to be improvement in output data globally in Jul, Aug and now also Sep. There is growing consensus that the world economy may not fall in recession but with higher doubts on Europe that manages a sovereign risk crisis with tough financial and political restrictions. Resolution of the European sovereign debt crisis would significantly improve the outlook for the world economy. Naturally, slower growth brings economies closer to contraction. Data for the US on industrial production confirm growth in Sep. The index of US industrial production of the Federal Reserve System finds growth of total industry of 0.2 percent in Sep and 3.2 percent in 12 months. Manufacturing rose 0.4 percent in Sep, 3.9 percent in the 12 months ending Sep and expanded in the quarter Jul-Sep at the annual equivalent rate of 5.7 percent. The Business Outlook Index of the Federal Reserve Bank of Philadelphia jumped from contraction level of minus 17.5 in Sep to positive 9.7 in Oct. New Orders rose from minus 11.3 in Sep to 7.9 in Oct.

2. Inflation. There is evidence of moderation of inflation in recent monthly data. Concern with 12 months is because of wage increases. In a return of risk appetite with zero interest rates, commodity prices would soar again, raising world inflation. There is a good characterization that central banks attempt to inflate the economy in a negatively-sloping short-term Phillips curve that may prove yet another academic myth already disproved by the increase in interest rates by the Fed in 1981. The contributions of Thomas J. Sargent (1982, 1999) are quite relevant. Inflation has accelerated in annual equivalent quarterly rates in the US both for the consumer price index and the producer price index.

3. Labor Markets. Advanced economies continue to be plagued by fractured labor markets without improving perspectives.

4. Output Growth. The world economy and especially advanced economies are struggling with low rates of growth. Advanced economies have accumulated substantial imbalances that may restrict future growth but at some point expectations of inevitable consolidation by taxation and increases in interest rates to end unparalleled accommodation may reduce growth rates

5. Financial Turbulence. There will continue to be sharp fluctuations in valuations of risk financial assets. In recent weeks, volumes have thinned in various financial markets with the possibility of sharper fluctuations by professionals accustomed to reversing exposures to realize profits. This is an essential function of price discovery. European sovereign risks and increasingly the electoral agenda in the US will continue causing turbulence in financial markets

There have been three waves of consumer price inflation in the US in 2011. The first wave occurred in Jan-Apr and was caused by the carry trade of commodity prices, food and energy, induced by unconventional monetary policy of zero interest rates. Cheap money at zero opportunity cost was channeled into financial risk assets, causing increases in commodity prices. The annual equivalent rate of increase of the all-items CPI in Jan-Apr was 7.5 percent and the CPI excluding food and energy increased at annual equivalent rate of 2.8 percent. The second wave occurred during the collapse of the carry trade from zero interest rates to exposures in commodity futures as a result of risk aversion in financial markets created by the sovereign debt crisis in Europe. The annual equivalent rate of increase of the all items CPI dropped to 2.0 percent but the annual equivalent rate of the CPI excluding food and energy increased to 3.3 percent. The third wave occurred in the form of increase of the all items annual equivalent rate to 4.9 percent in Jul-Sep with the annual equivalent rate of the CPI excluding food and energy dropping to 2.0 percent. The conclusion is that inflation accelerates and decelerates in unpredictable fashion that turns symmetric inflation targets in a source of destabilizing shocks to the financial system and eventually the overall economy.

Unconventional monetary policy of zero interest rates and large-scale purchases of long-term securities for the balance sheet of the central bank is proposed to prevent deflation. The data of CPI inflation of all goods and CPI inflation excluding food and energy for the past six decades show only one negative change by 0.4 percent in the CPI all goods annual index in 2009 but not one year of negative annual yearly change in the CPI excluding food and energy annual inflation (http://cmpassocregulationblog.blogspot.com/2011/08/world-financial-turbulence-global.html). Zero interest rates and quantitative easing are designed to lower costs of borrowing for investment and consumption, increase stock market valuations and devalue the dollar. In practice, the carry trade is from zero interest rates to a large variety of risk financial assets including commodities. Resulting food and energy price inflation squeezes family budgets and deteriorates the terms of trade with negative effects on aggregate demand and employment. Excessive valuations of risk financial assets eventually result in crashes of financial markets with possible adverse effects on economic activity and employment.

Producer price inflation history in the past five decades does not provide evidence of deflation. The finished core PPI does not register even one single year of decline. The headline PPI experienced only six isolated cases of decline (http://cmpassocregulationblog.blogspot.com/2011/08/world-financial-turbulence-global.html):

-0.3 percent in 1963,

-1.4 percent in 1986,

-0.8 percent in 1986,

-0.8 percent in 1998,

-1.3 percent in 2001

-2.6 percent in 2009.

Deflation should show persistent cases of decline of prices and not isolated events. Fear of deflation in the US has caused a distraction of monetary policy. Symmetric inflation targets around 2 percent in the presence of multiple lags in effect of monetary policy and imperfect knowledge and forecasting are mostly unfeasible and likely to cause instability instead of desired price stability.

Chart ES1 provides the consumer price index NSA from 1960 to 2011. The dominating characteristic is the increase in slope during the Great Inflation from the middle of the 1960s through the 1970s. There is long-term inflation in the US and no evidence of deflation risks.

Chart ES1, US, Consumer Price Index, NSA, 1960-2011

Source: US Bureau of Labor Statistics

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

Chart ES2 provides 12 month percentage changes of the consumer price index from 1960 to 2011. There are actually three waves of inflation in the second half of the 1960s, in the mid 1970s and again in the late 1970s. Inflation rates then stabilized in a range with only two episodes above 5 percent.

Chart ES2, US, Consumer Price Index, All Items, 12 Month Percentage Change 1960-2011

Source: US Bureau of Labor Statistics

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

Chart ES3 provides the consumer price index excluding food and energy from 1960 to 2011. There is long-term inflation in the US without episodes of deflation.

Chart ES3, US, Consumer Price Index Excluding Food and Energy, NSA, 1960-211

Source: US Bureau of Labor Statistics

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

Chart ES3 provides 12 months percentage changes of the consumer price index excluding food and energy from 1960 to 2011. Core inflation did exist during the Great Inflation and was conquered simultaneously with headline inflation.

Chart ES3, US, Consumer Price Index Excluding Food and Energy, 12 Month Percentage Change, NSA, 1960-2011

Source: US Bureau of Labor Statistics

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

The evident lack of deflation risks in the US economy supports reconsideration of unconventional monetary policy and the return to normalcy. Potential benefits of stimulating the economy are outweighed by the costs of distortions.

I Monetary Policy of Prosperity without Inflation. This section analyzes the objectives of current monetary policy of attaining prosperity while restraining inflation that has dominated policy making during the past decade. Prosperity is considered in the narrow sense of aggregate economic growth that maintains full employment (Hicks 1975). Inflation is considered as restraining inflation at what is now generally accepted as change of the consumer price index of two percent per year. Subsection IA Monetary Policy of Prosperity without Inflation considers the norms of policy in the light of the current reports on consumer and producer price inflation. A technical appendix, Subsection IB Appendix Great Inflation and Unemployment Analysis, provides more technical analysis of theory and empirical measurement that can be skipped by readers with less time for technical details. Appendix I The Great Inflation at the end of this comment provides further information.

IA Prosperity and Inflation. This section is divided into two subsections. The framework used currently in central banking is provided in subsection IA1 Theory and Policy of Central Banking. Historical inflation data and the current inflation reports of the US are analyzed in subsection IA2 US Inflation.

IA1 Theory and Policy of Central Banking. “Flexible inflation targeting” has dominated monetary policy during the past decade in several central banks (see Pelaez and Pelaez, Regulation of Banks and Finance (2009a), 99-116, Financial Regulation after the Global Recession (2009b), 85-90). “Central bank doctrine and practice” has been reformulated by Chairman Bernanke (2011Oct18) in the light of the experience of the global recession that afflicted the US between IVQ2007 (fourth quarter 2007) and IIQ2009 (http://www.nber.org/cycles.html). “Doctrine” has much less precision and uncertainty of results than “science” as systematic pursuit of knowledge. Reflecting on the need to bridge academic knowledge with practical experience, Blinder (1997, 17) referred to a “science” of central banking:

“Having looked at monetary policy from both sides now, I can testify that central banking in practice is as much art as science. Nonetheless, while practicing this dark art, I always found the science quite useful. And I came to believe that the Federal Reserve and other central banks could profit from more disciplined and systematic thinking.

There has long been a symbiosis between practical central banking and academic research on monetary policy. Poole's analysis of the choice of the monetary instrument is only the most outstanding example. But while this symbiotic relationship continues, I believe that large potential gains from trade in ideas between practitioners and academics remain unexploited.

As a general matter, I firmly believe that monetary policymaking in the United States and other countries could and should become far more conceptual and less situational. This sounds a bit like saying that central banking should become "more academic"; but, as you will see in a moment, that is not what I mean. My experience at the Fed convinced me that central bankers are often so absorbed by the "trees" of the current economic situation that they lose sight of the macroeconomic "forest." They need to be constantly reminded of the latter. They need to specify their ultimate goals and their long-run plans to achieve them, however tentative those plans may be. And they need to internalize better the dynamic programming way of thinking”

A landmark synthesis of the “science of monetary policy” is provided by Clarida, Galí and Gertler (1999). The existence of such a science was also claimed much earlier by Heller (1966), Okun (1972) and Tobin (1970, 1980). The contention of the earlier claim was not very different that textbook economics provides policy tools to maintain continuously full employment of labor, capital and natural resources, or prosperity, while at the same time restraining inflation. The consensus or “neoclassical synthesis” is based on a relation in the “short term” known as the “augmented Phillips curve” that can be simplified in words as follows:

(current unemployment less natural unemployment) depends inversely on (current inflation less inflation expectations)

(output gap) depends inversely on (inflation gap)

When the gap of actual output tightens relative to the maximum possible or potential output, inflation increases above normal or expected inflation. Inflation is determined by “slack” or unused potential in product and labor markets. Thus, inflation accelerates when the economy is moving toward full utilization of resources such as installed equipment, labor and natural resources. When the economy is growing slowly with less than full utilization of capacity and high unemployment, as currently, more equipment can be installed without increasing costs and more labor can be hired without increasing wages. The role of monetary policy is to lower interest rates such that lower financing costs of equipment and of consuming goods can increase aggregate investment and consumption that can raise output and employment but without increasing prices. Inflation would only accelerate when the economy moves toward full utilization of capacity and full employment of labor.

Central bank policy can be simplified to managing the short-term policy interest rate in accordance with the output gap and the inflation gap:

(Fed funds rate) depends on (output gap) and (inflation gap)

The central bank controls the fed funds rate or rate in overnight loans by banks of reserves deposited at the regional Federal Reserve Banks. This rate is the cost of lending an additional dollar for consumption and investment. A decrease in the fed funds rate lowers the cost of lending to banks that in turn lowers the rates charged to customers for loans to investors and consumers. The resulting increase in investment and consumption, that together make aggregate demand for goods and services in the economy, causes an increase in aggregate output, reducing the gap between actual and potential output and thus unemployment.

When slack in product and labor markets is reduced, inflation can accelerate. The central bank can then increase the fed funds rate. The increase in the cost of lending to banks causes an increase in the rates charged to investors and consumers with resulting decrease in consumption and investment that increases slack in product and labor markets. The increase in interest rates lowers inflation.

An important analysis of the Great Inflation of the 1960s and 1970s is the “inflation hills” of Blinder (1979, 1982) and Blinder and Rudd (2010). “Headline inflation” is the index of all items such as the consumer price index (CPI) all items. “Core inflation” is the index of all items excluding food and energy. “Inflation hills” are caused by “supply shocks,” which consist mostly of political events or events of nature that restrict supply of commodities, increasing their prices. An example of political events in the 1970s was the Iranian Revolution that caused spikes in oil prices and an example of events of nature is a frost in Florida that causes destruction of oranges and increases in orange juice prices. Aggregate demand determines underlying or core inflation in such a way that inflation hills collapse after the end of geopolitical and nature events. Thus, headline inflation converges toward core or actual inflation. The indicator of inflation for monetary policy is core inflation that predicts where headline inflation will be a year from now.

Monetary policy in the US between the second half of the 1960s and 1980 concentrated on minimizing the output gap. Research reviewed in IB Appendix Great Inflation and Unemployment Analysis explains the resulting highest inflation in a historical period in the US with high unemployment, known as stagflation, by three different arguments.

First, Inflation Surprise. The monetary authorities believed in the short-term tradeoff of inflation and unemployment. Deliberately, the monetary authorities implemented policies that would create an “inflation surprise” (Kydland and Prescott 1977, Barro and Gordon 1983). The economy would reduce the output gap but at the expense of an inflation gap. The central bank created “stops and go” economic conditions: the economy expanded with inflation surprise and then was restrained when inflation increased to higher undesirable levels.

Second, Model Error. The monetary authorities did not have current methods of optimal control. Lack of current knowledge prevented management of the output and inflation gaps optimally (Clarida, Galí and Gertler 2000). Recently, Orphanides and Williams (2010) have provided econometric evidence that the policies of concentrating solely on the output gap while ignoring the inflation gap followed in the Great Inflation would have resulted in policy errors even if the authorities of the time had current central banking methods.

Third, Measurement Error. The monetary authorities relied on measurements of potential output that was higher, causing errors in ignoring inflation (Orphanides 2003, 2004). Recently, Orphanides and Williams (2010) have reconstructed the policy of the 1960s and 1970 with correct measurements of potential output, showing that there would have been inflation even with accurate input of potential output in monetary policy decisions.

An important strand of analysis of the Great Inflation is the consequence of coordination of monetary and fiscal policy, or what Sargent and Wallace (1981) have called “unpleasant monetarist arithmetic.” If the demand for base money depends on inflation expectations together with other assumptions, loser monetary policy can result in higher inflation now and also in the future. Base money consists of the monetary liabilities of the government, which are currency held by the public and reserves of banks deposited at the central bank. Sargent and Wallace (1973, 1046) show that if the demand for real cash balances depends on the expected rate of inflation, “the equilibrium value of the price level at the current moment is seen to depend on the (expected) path of the money supply from now until forever.” The anticipation of high rates of base money growth in the future may increase the rate of inflation now. Sargent and Wallace (1981) show that currently tight monetary policy may not be potent to even lower the current rate of inflation. If fiscal policy dominates monetary policy with a sequence of deficits, monetary policy has to adapt within the budget constraint that the government finances deficits with seigniorage or printing money and borrowing from the public by issuing Treasury securities. If the sequence of deficits is “too big for too long,” under the assumptions of the model, “the monetary authority can make money tighter now only by making it looser later” (Sargent and Wallace 1981, 7). In the analysis of the hyperinflations in Europe, Sargent (1982, 89-90) concludes:

“The essential measures that ended hyperinflations in each of Germany, Austria, Hungary, and Poland were, first, the creation of an independent central bank that was legally committed to refuse the government’s demand for additional unsecured credit and, second, a simultaneous alteration in the fiscal policy regime. These measures were interrelated and coordinated. They had the effect of binding the government to place its debt with private parties and foreign governments which would value that debt according to whether it was backed by sufficiently large prospective taxes relative to public expenditures. In each case that we have studied, once it became widely understood that the government would not rely on the central bank for its finance, the inflation terminated and the exchanges stabilized. The four incidents we have studied are akin to laboratory experiments in which the elemental forces that cause and can be used to stop inflation are easiest to spot. I believe that these incidents are full of lessons about our own, less drastic predicament with inflation, if only we interpret them correctly.”

Economics has been enriched by the pathbreaking contributions of Thomas J. Sargent and Christopher A. Sims (see Sims 1980, 1972). Their contributions have received momentous recognition (http://www.kva.se/en/pressroom/Press-releases-2011/The-Prize-in-Economic-Sciences-2011/):

“The Royal Swedish Academy of Sciences has decided to award the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2011 toThomas J. Sargent, New York University, New York, NY, USA, and Christopher A. Sims, Princeton University, Princeton, NJ, USA,

“for their empirical research on cause and effect in the macroeconomy”.

Thomas Sargent has shown how structural macroeconometrics can be used to analyze permanent changes in economic policy. This method can be applied to study macroeconomic relationships when households and firms adjust their expectations concurrently with economic developments. Sargent has examined, for instance, the post-World War II era, when many countries initially tended to implement a high-inflation policy, but eventually introduced systematic changes in economic policy and reverted to a lower inflation rate.

Christopher Sims has developed a method based on so-called vector autoregression to analyze how the economy is affected by temporary changes in economic policy and other factors. Sims and other researchers have applied this method to examine, for instance, the effects of an increase in the interest rate set by a central bank. It usually takes one or two years for the inflation rate to decrease, whereas economic growth declines gradually already in the short run and does not revert to its normal development until after a couple of years.

Although Sargent and Sims carried out their research independently, their contributions are complementary in several ways. The laureates’ seminal work during the 1970s and 1980s has been adopted by both researchers and policymakers throughout the world. Today, the methods developed by Sargent and Sims are essential tools in macroeconomic analysis.”

The contributions of Sargent and Sims opened many avenues for research. This note originates in a personal experience. Pelaez and Suzigan (1981) provided the monetary statistics of Brazil yearly 1808-1851 and quarterly 1852-1971 (see Pelaez 1974, 1975, 1976a,b, 1977, 1979, Pelaez and Suzigan 1978, 1981). The Granger-Sims test of Sims (1972) was applied to these data in the effort to discover the correct specification of regressions of money, income and prices (see Pelaez and Suzigan 1978, 192-99; Pelaez 1979, 103-12). This is just one of many cases in which economists benefitted immensely in their research from the outstanding contributions of Sargent and Sims.

The current framework used in central banking is formulated by Bernanke (2011Oct18) as:

“During the two decades preceding the crisis, central bankers and academics achieved a substantial degree of consensus on the intellectual and institutional framework for monetary policy. This consensus policy framework was characterized by a strong commitment to medium-term price stability and a high degree of transparency about central banks' policy objectives and economic forecasts. The adoption of this approach helped central banks anchor longer-term inflation expectations, which in turn increased the effective scope of monetary policy to stabilize output and employment in the short run. This broad framework is often called flexible inflation targeting, as it combines commitment to a medium-run inflation objective with the flexibility to respond to economic shocks as needed to moderate deviations of output from its potential, or "full employment," level. The combination of short-run policy flexibility with the discipline imposed by the medium-term inflation target has also been characterized as a framework of "constrained discretion."”

There is an obvious “symmetric inflation target” by which monetary policy would reduce interest rates toward zero when core inflation measured by the core index of personal consumption expenditures (core PCE) falls below 2 percent and would increase interest rates when core inflation exceeds 2 percent. “Flexible targeting” also considers reduction of the output gap while there is slack in product and labor markets, which prevents acceleration of inflation. Because inflation is never in an infinitesimal open interval of (1.99, 2.00) and unemployment in an interval of (5.39, 5.40), the central bank is almost always engaged in active monetary policy.

In addition, the central bank engages in “unconventional monetary policy.” When deflation threatens, fed funds rates are reduced toward zero as has been the case since Dec 16, 2008 (http://www.federalreserve.gov/newsevents/press/monetary/20081216b.htm). Forward guidance of maintaining fed funds rates at near zero until 2013 is another unconventional tool (http://www.federalreserve.gov/newsevents/press/monetary/20110809a.htm). Unconventional monetary policy has also included quantitative easing, or the purchase of long-term securities to lower their yields with the objective of reducing the costs of borrowing for investment and consumption (http://www.federalreserve.gov/newsevents/press/monetary/20081216b.htm http://www.federalreserve.gov/newsevents/press/monetary/20101103a.htm). “Operation twist” repeats similar policy in 1961 of selling short-term securities to buy long-term securities with the objective of reducing borrowing costs for investment and consumption (http://www.federalreserve.gov/newsevents/press/monetary/20110921a.htm). Monetary policy has also engaged in buying mortgage-backed securities to lower costs of mortgages with the objective of reducing borrowing costs of purchases of houses. These policies are analyzed in past comments of this blog (http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.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).

The central bank also engaged in policies of financial stability. The central bank provided 11 different liquidity facilities during the financial crisis (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009b), 157-62, Regulation of Banks and Finance, 224-7). Bernanke (2011Oct18) explains:

“Following a much older tradition of central banking, the crisis has forcefully reminded us that the responsibility of central banks to protect financial stability is at least as important as the responsibility to use monetary policy effectively in the pursuit of macroeconomic objectives.”

IA2 US Inflation. Unconventional monetary policy of zero interest rates and quantitative easing has been inspired by fear of deflation (see Pelaez and Pelaez, International Financial Architecture (2005), 18-28, The Global Recession Risk (2007), 83-95). Key percentage average yearly rates of the US economy on growth and inflation are provided in Table 1 updated with release of new data. The choice of dates prevents the measurement of long-term potential economic growth because of two recessions from IQ2001 (Mar) to IVQ2001 (Nov) with decline of GDP of 0.4 percent and the drop in GDP of 5.1 percent in IVQ2007 (Dec) to IIQ2009 (June) (http://www.nber.org/cycles.html) followed with unusually low economic growth for an expansion phase after recession with the economy growing at the annual equivalent rate of 0.8 percent in the first half of 2011 (http://cmpassocregulationblog.blogspot.com/2011/10/us-growth-standstill-at-08-percent.html). Between 2000 and 2010, real GDP grew at the average rate of 1.6 percent per year, nominal GDP at 3.9 percent and the implicit deflator at 2.5 percent. The average rate of CPI inflation was 2.4 percent per year and 2.5 percent excluding food and energy. PPI inflation increased at 2.7 percent per year on average and at 1.6 percent excluding food and energy. There is also inflation in international trade. Import prices grew at 2.5 percent per year between 2000 and 2010 and 3.4 percent between 2000 and 2011. The commodity price shock is revealed by inflation of import prices of petroleum at 12.4 percent per year between 2000 and 2010 and at 14.8 percent between 2000 and 2011. The average growth rates of import prices excluding fuels are much lower at 1.7 percent for 2002 to 2010 and 2.1 percent for 2000 to 2011. Export prices rose at the average rate of 2.1 percent between 2000 and 2010 and at 2.7 percent in 2000 to 2011. What spared the US of sharper decade-long deterioration of the terms of trade, (export prices)/(import prices) was its diversification and competitiveness in agriculture. Agricultural export prices grew at the average yearly rate of 5.2 percent from 2000 to 2010 and at 6.6 percent from 2000 to 2011. US nonagricultural export prices rose at 1.8 percent per year in 2000 to 2010 and at 2.3 percent in 2000 to 2011. These dynamic growth rates are not similar to those for the economy of Japan where inflation was negative in seven of the 10 years in the 2000s.

Table 1, US, Average Growth Rates of Real and Nominal GDP, Consumer Price Index, Producer Price Index and Import and Export Prices, Percent per Year

Real GDP	2000-2010: 1.6%
Nominal GDP	2000-2010: 3.9%
Implicit Price Deflator	2000-2010: 2.5%
CPI	2000-2010: 2.4% 2000-2011: 2.5%
CPI ex Food and Energy	2000-2010: 2.0% 2000-2011: 1.9%
PPI	2000-2010: 2.7% 2000-2011: 3.0%
PPI ex Food and Energy	2000-2010: 1.6% 2000-2011: 1.7%
Import Prices	2000-2010: 2.5% 2000-2011: 3.4%
Import Prices of Petroleum and Petroleum Products	2000-2010: 12.4% 2000-2011: 14.8%
Import Prices Excluding Fuels	2002-2010: 1.7% 2002-2011: 2.1%
Export Prices	2000-2010: 2.1% 2000-2011: 2.7%
Agricultural Export Prices	2000-2010: 5.2% 2000-2011: 6.6%
Nonagricultural Export Prices	2000-2010: 1.8% 2000-2011: 2.3%

Note:rates for price indexes in the row beginning with “CPI” and ending in the row “Nonagricultural Export Prices” are for Sep 2000 to Sep 2010 and and for Sep 2010 to Sep 2011. Import prices excluding fuels are not available before 2002.

Sources:

http://www.bea.gov/iTable/index_nipa.cfm http://www.bls.gov/ppi/data.htm

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

Unconventional monetary policy of zero interest rates and large-scale purchases of long-term securities for the balance sheet of the central bank is proposed to prevent deflation. The data of CPI inflation of all goods and CPI inflation excluding food and energy for the past six decades show only one negative change by 0.4 percent in the CPI all goods annual index in 2009 but not one year of negative annual yearly change in the CPI excluding food and energy annual inflation (http://cmpassocregulationblog.blogspot.com/2011/08/world-financial-turbulence-global.html). Zero interest rates and quantitative easing are designed to lower costs of borrowing for investment and consumption, increase stock market valuations and devalue the dollar. In practice, the carry trade is from zero interest rates to a large variety of risk financial assets including commodities. Resulting commodity price inflation squeezes family budgets and deteriorates the terms of trade with negative effects on aggregate demand and employment. Excessive valuations of risk financial assets eventually result in crashes of financial markets with possible adverse effects on economic activity and employment.

-0.3 percent in 1963,

-1.4 percent in 1986,

-0.8 percent in 1986,

-0.8 percent in 1998,

-1.3 percent in 2001

-2.6 percent in 2009.

Chart 1 provides US nominal GDP from 1980 to 2010. The only major bump in the chart occurred in the recession of IVQ2007 to IIQ2009. Tendency for deflation would be reflected in persistent bumps. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.5 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). The comparison of the global recession after 2007 with the Great Depression is entirely misleading.

Chart 1, US, Nominal GDP 1980-2010

Source: US Bureau of Economic Analysis

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

Chart 2 provides US real GDP from 1980 to 2010. Persistent deflation threatening real economic activity would also be reflected in the series of long-term growth of GDP. There is no such behavior in Chart 3 except for periodic recessions in the US economy that have occurred throughout history.

Chart 2, US, Real GDP 1980-2010

Source: US Bureau of Economic Analysis

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

Deflation would also be in evidence in long-term series of prices in the form of bumps. The GDP implicit deflator series in Chart 3 from 1980 to 2010 shows rather dynamic behavior over time. The US economy is not plagued by deflation but by long-run inflation.

Chart 3, US, GDP Implicit Price Deflator 1980-2010

Source: US Bureau of Economic Analysis

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

The producer price index of the US from 1960 to 2011 in Chart 4 shows various periods of more rapid or less rapid inflation but no bumps. The major event is the decline in 2008 when risk aversion because of the global recession caused the collapse of oil prices from $148/barrel to less than $80/barrel with most other commodity prices also collapsing. The event had nothing in common with explanations of deflation but rather with the concentration of risk exposures in commodities after the decline of stock market indexes. Eventually, there was a flight to government securities because of the fears of insolvency of banks caused by statements supporting proposals for withdrawal of toxic assets from bank balance sheets in the Troubled Asset Relief Program (TARP), as explained by Cochrane and Zingales (2009).

Chart 4, US, Producer Price Index, Finished Goods, NSA, 1960-2011

Source: US Bureau of Labor Statistics

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

Chart 5 provides 12 month percentage changes of the producer price index from 1960 to 2011. The distinguishing event in Chart 3 is the Great Inflation of the 1970s. The shape of the two-hump Bactrian camel of the 1970s resembles the double hump from 2007 to 2011.

Chart 5, US, Producer Price Index, Finished Goods, 12 Months Percentage Change, NSA, 1960-2011

Source: US Bureau of Labor Statistics

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

The producer price index excluding food and energy from 1974, the first historical data of availability in the dataset of the Bureau of Labor Statistics (BLS), to 2011, shows similarly dynamic behavior as the overall index, as shown in Chart 6. There is no evidence of persistent deflation in the US PPI.

Chart 6, US Producer Price Index, Finished Goods Excluding Food and Energy, SA, 1974-2011

Source: US Bureau of Labor Statistics

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

Chart 7 provides 12 months rates of change of the finished goods index excluding food and energy. The dominating characteristic is the Great Inflation of the 1970s. The double hump illustrates how inflation may appear to be subdued and then returns with strength.

Chart 7, US Producer Price Index, Finished Goods Excluding Food and Energy, 12 Month Percentage Change, NSA, 1974-2011

Source: US Bureau of Labor Statistics

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

The producer price index of energy goods from 1974 to 2011 is provided in Chart 8. The first jump occurred during the Great Inflation of the 1970s analyzed in various comments of this blog (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) and in Appendix I. There is relative stability of producer prices after 1986 with another jump and decline in the late 1990s into the early 2000s. The episode of commodity price increases during a global recession in 2008 could only have happened with interest rates dropping toward zero, which stimulated the carry trade from zero interest rates to leveraged positions in commodity futures. Commodity futures exposures were dropped in the flight to government securities after Sep 2008. Commodity future exposures were created again when risk aversion diminished around Mar 2011 after the finding that US bank balance sheets did not have the toxic assets that were mentioned in proposing TARP in Congress (see Cochrane and Zingales 2009). Fluctuations in commodity prices and other risk financial assets originate in carry trade when risk aversion ameliorates.

Chart 8, US, Producer Price Index, Finished Energy Goods, SA, 1974-2011

Source: US Bureau of Labor Statistics

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

Chart 9 shows the 12 month percentage change of the producer price index of finished energy goods from 1975 to 2011. This index is only available after 1974 and captures only one of the humps of energy prices during the Great Inflation. Fluctuations in energy prices have occurred throughout history in the US but without provoking deflation. Two cases are the decline of oil prices in 2001 to 2002 that has been analyzed by Barsky and Kilian (2004) and the collapse of oil prices from over $140/barrel with shock of risk aversion to the carry trade in Sep 2008.

Chart 9, US, Producer Price Index, Finished Energy Goods, 12 Month Percentage Change, NSA, 1974-2011

Source: US Bureau of Labor Statistics

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

Chart 10 provides the consumer price index NSA from 1960 to 2011. The dominating characteristic is the increase in slope during the Great Inflation from the middle of the 1960s through the 1970s. There is long-term inflation in the US and no evidence of deflation risks.

Chart 10, US, Consumer Price Index, NSA, 1960-2011

Source: US Bureau of Labor Statistics

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

Chart 11 provides 12 month percentage changes of the consumer price index from 1960 to 2011. There are actually three waves of inflation in the second half of the 1960s, in the mid 1970s and again in the late 1970s. Inflation rates then stabilized in a range with only two episodes above 5 percent.

Chart 11, US, Consumer Price Index, All Items, 12 Month Percentage Change 1960-2011

Source: US Bureau of Labor Statistics

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

Chart 12 provides the consumer price index excluding food and energy from 1960 to 2011. There is long-term inflation in the US without episodes of deflation.

Chart 12, US, Consumer Price Index Excluding Food and Energy, NSA, 1960-2011

Source: US Bureau of Labor Statistics

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

Chart 13 provides 12 months percentage changes of the consumer price index excluding food and energy from 1960 to 2011. Core inflation did exist during the Great Inflation and was conquered simultaneously with headline inflation. Sargent (1999) finds that inflation could return (see also Sargent 1983).

Chart 13, US, Consumer Price Index Excluding Food and Energy, 12 Month Percentage Change, NSA, 1960-2011

Source: US Bureau of Labor Statistics

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

The consumer price index of housing is provided in Chart 14. There was also acceleration during the Great Inflation of the 1970s. The index flattens after the global recession in IVQ2007 to IIQ2009. Housing prices collapsed under the weight of construction of several times more housing than needed. Surplus housing originated in subsidies and artificially low interest rates in the shock of unconventional monetary policy in 2003 to 2004 in fear of deflation.

Chart 14, US, Consumer Price Index Housing, NSA, 1967-2011

Source: US Bureau of Labor Statistics

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

Chart 15 provides 12 months percentage changes of the housing CPI. The Great Inflation also had extremely high rates of housing inflation. Housing is considered as potential hedge of inflation.

Chart 15, US, Consumer Price Index, Housing, 12 Month Percentage Change, NSA, 1968-2011

Source: US Bureau of Labor Statistics

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

Consumer price inflation has accelerated in recent months. Table 2 provides the 12 months and annual equivalent rate for the months of Jul to Sep of the CPI and major segments. CPI inflation in the 12 months ending in Sep reached 3.9 percent and the annual equivalent rate Jul-Sep was 4.9 percent. Excluding food and energy, CPI inflation was 2.0 percent. There is no deflation in the US economy that could justify further quantitative. Consumer food prices in the US have risen 4.7 percent in 12 months and 5.3 percent in annual equivalent in Jul-Sep. Monetary policies stimulating carry trades of commodities that increase prices of food constitute a highly regressive tax on lower income families for whom food is a major portion of the consumption basket. Energy prices returned with increase of 19.3 percent in 12 months and 26.8 percent in annual equivalent in Jul-Aug. For the lower income families, food and energy are a major part of the family budget. Inflation is not low or threatening deflation in annual equivalent in Jul-Sep in any of the categories in Table 2.

Table 2, US, Consumer Price Index Percentage Changes 12 months NSA and Annual Equivalent ∆%

	∆% 12 Months Sep 2011/Sep 2010 NSA	∆% Annual Equivalent Jul-Sep 2011 SA
CPI All Items	3.9	4.9
CPI ex Food and Energy	2.0	2.0
Food	4.7	5.3
Food at Home	6.3	7.4
Food Away from Home	2.6	3.3
Energy	19.3	26.8
Gasoline	33.3	45.3
Fuel Oil	33.4	-10.7
New Vehicles	3.6	0.0
Used Cars and Trucks	5.1	4.1
Medical Care Commodities	3.0	3.4
Apparel	3.5	4.8
Services Less Energy Services	2.0	2.4
Shelter	1.7	2.4
Transportation Services	3.2	2.4
Medical Care Services	2.8	3.3

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

The weights of the CPI, US city average, are shown in Table 3. Housing has a weight of 41.460 percent. The combined weight of housing and transportation is 58.768 percent or more than one half. The combined weight of housing, transportation and food and beverages is 73.56 percent of the US CPI.

Table 3, US, Relative Importance, 2007-2008 Weights, of Components in the Consumer Price Index, US City Average, Dec 2010

All Items	100.000
Food and Beverages	14.792
Food	13.742
Food at home	7.816
Food away from home	5.926
Housing	41.460
Shelter	31.955
Rent of primary residence	5.925
Owners’ equivalent rent	24.905
Apparel	3.601
Transportation	17.308
Private Transportation	16.082
New vehicles	3.513
Used cars and trucks	2.055
Motor fuel	5.079
Gasoline	4.865
Medical Care	6.627
Medical care commodities	1.633
Medical care services	4.994
Recreation	6.293
Education and Communication	6.421
Other Goods and Services	3.497

Source: ftp://ftp.bls.gov/pub/special.requests/cpi/cpiri2010.txt

Chart 16 provides the US consumer price index for housing from 2001 to 2011. Housing prices rose sharply during the decade until the bump of the global recession and are increasing again in 2011. The CPI excluding housing would likely show much higher inflation. Income left after paying for indispensable shelter has been compressed by the commodity carry trades resulting from unconventional monetary policy.

Chart 16, US, Consumer Price Index, Housing, NSA, 2001-2011

Source: US Bureau of Labor Statistics

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

Chart 17 provides 12 month percentage changes of the housing CPI. Percentage changes collapsed during the global recession but have been rising into positive territory in 2011.

Chart 17, US, Consumer Price Index, Housing, 12 Month Percentage Change, NSA, 2001-2011

Source: US Bureau of Labor Statistics

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

There have been three waves of consumer price inflation in the US in 2011 that are illustrated in Table 4. The first wave occurred in Jan-Apr and was caused by the carry trade of commodity prices induced by unconventional monetary policy of zero interest rates. Cheap money at zero opportunity cost was channeled into financial risk assets, causing increases in commodity prices. The annual equivalent rate of increase of the all-items CPI in Jan-Apr was 7.5 percent and the CPI excluding food and energy increased at annual equivalent rate of 2.8 percent. The second wave occurred during the collapse of the carry trade from zero interest rates to exposures in commodity futures as a result of risk aversion in financial markets created by the sovereign debt crisis in Europe. The annual equivalent rate of increase of the all items CPI dropped to 2.0 percent but the annual equivalent rate of the CPI excluding food and energy increased to 3.3 percent. The third wave occurred in the form of increase of the all items annual equivalent rate to 4.9 percent in Jul-Sep with the annual equivalent rate of the CPI excluding food and energy dropping to 2.0 percent. The conclusion is that inflation accelerates and decelerates in unpredictable fashion that turns symmetric inflation targets in a source of destabilizing shocks to the financial system and eventually the overall economy.

Table 4, US, Headline and Core CPI Inflation Monthly SA and 12 Months NSA ∆%

	All Items SA Month	All Items NSA 12 month	Core SA Month	Core NSA 12 months
Sep 2011	0.3	3.9	0.1	2.0
Aug	0.4	3.8	0.2	2.0
Jul	0.5	3.6	0.2	1.8
AE ∆% Jul-Sep	4.9		2.0
Jun	-0.2	3.6	0.3	1.6
May	0.2	3.6	0.3	1.5
AE ∆% May-Jul	2.0		3.3
Apr	0.4	3.2	0.2	1.3
Mar	0.5	2.7	0.1	1.2
Feb	0.5	2.1	0.2	1.1
Jan	0.4	1.6	0.2	1.0
AE ∆% Jan-Apr	7.5		2.8
Dec 2010	0.4	1.5	0.1	0.8
Nov	0.1	1.1	0.1	0.8
Oct	0.2	1.2	0.0	0.6
Sep	0.2	1.1	0.0	0.8
Aug	0.2	1.1	0.1	0.9
Jul	0.3	1.2	0.1	0.9
Jun	-0.2	1.1	0.1	0.9
May	-0.1	2.0	0.1	0.9
Apr	0.0	2.2	0.0	0.9
Mar	0.0	2.3	0.0	1.1
Feb	0.0	2.1	0.1	1.3
Jan	0.1	2.6	-0.1	1.6

Note: Core: excluding food and energy; AE: annual equivalent

Source: US Bureau of Labor Statistics

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

The behavior of the US consumer price index NSA from 2001 to 2011 is provided in Chart 18. Inflation in the US is very dynamic without deflation risks that would justify symmetric inflation targets. The hump in 2008 originated in the carry trade from interest rates dropping to zero into commodity futures. There is no other explanation for the increase of oil prices toward $140/barrel during the global recession. The unwinding of the carry trade with the TARP announcement of toxic assets in banks channeled cheap money into government obligations (see Cochrane and Zingales 2009).

Chart 18, US, Consumer Price Index, NSA, 2001-2011

Source: US Bureau of Labor Statistics

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

Chart 19 provides 12 month percentage changes of the consumer price index from 2001 to 2011. There was no deflation or threat of deflation from 2008 into 2009. Commodity prices collapsed during the panic of toxic assets in banks. When stress tests revealed US bank balance sheets in much stronger position, cheap money at zero opportunity cost exited government obligations and flowed into carry trades of risk financial assets. Increases in commodity prices drove again the all items CPI with interruptions during risk aversion originating in the sovereign debt crisis of Europe.

Chart 19, US, Consumer Price Index, 12 Month Percentage Change, NSA, 2001-2011

Source: US Bureau of Labor Statistics

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

The trend of increase of the consumer price index excluding food and industry in Chart 20 does not reveal any threat of deflation that would justify symmetric inflation targets. There are mild oscillations in a neat upward trend.

Chart 20, US, Consumer Price Index Excluding Food and Energy, NSA, 2001-2011

Source: US Bureau of Labor Statistics

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

Chart 21 provides 12 month percentage change of the consumer price index excluding food and energy. Past-year rates of inflation fell toward 1 percent from 2001 into 2003 as a result of the recession and the decline of commodity prices beginning before the recession with declines of real oil prices. Near zero interest rates with fed funds at 1 percent between Jun 2003 and Jun 2004 stimulated carry trades of all types, including in buying homes with subprime mortgages in expectation that low interest rates forever would increase home prices permanently, creating the equity that would permit the conversion of subprime mortgages into creditworthy mortgages (Gorton 2009EFM; see http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html). Inflation rose and then collapsed during the unwinding of carry trades and the housing debacle of the global recession. Carry trade into 2011 gave a new impulse to CPI inflation, all items and core. Symmetric inflation targets destabilize the economy by encouraging hunts for yields that inflate and deflate financial assets.

Chart 21, US, Consumer Price Index Excluding Food and Energy, 12 Month Percentage Change, NSA, 2001-2011

Source: US Bureau of Labor Statistics

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

The headline and core producer price index are in Table 5. The headline PPI increased 0.8 percent SA in Sep, raising the 12 month- rate NSA to 6.9 percent. The core PPI SA rose 0.2 percent in Sep and 2.5 percent in 12 months. Analysis of annual equivalent rates of change shows three different waves. In the first wave, the absence of risk aversion from the sovereign risk crisis in Europe, zero interest rates motivated the carry trade into commodity futures that caused the average equivalent rate of 17.3 percent in the headline PPI in Jan-Apr and 5.3 percent in the core PPI. In the second wave, commodity futures prices collapsed in May with the return of risk aversion originating in the sovereign risk crisis of Europe. The annual equivalent rate of headline PPI inflation collapsed to 0.8 percent in May-Jul but the core annual equivalent inflation rate was much higher at 3.3 percent. In the third wave, headline PPI inflation resuscitated with annual equivalent 4.1 percent in Jul-Sep and core PPI inflation was 2.8 percent. Core PPI inflation has been persistent throughout 2011 and has jumped from around 1 percent in the first four months of 2010 to 2.5 percent in 12 months and 2.8 percent in annual equivalent rate. It is impossible to forecast PPI inflation and its relation to CPI inflation. “Inflation surprise” by monetary policy could be proposed to climb along a downward sloping Phillips curve, resulting in higher inflation but lower unemployment (see Kydland and Prescott 1977, Barro and Gordon 1983 and past comments of this blog 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). The architects of monetary policy would require superior inflation forecasting ability compared to forecasting naivety by everybody else. In practice, we are all naïve in forecasting inflation and other economic variables and events.

Table 5, US, Headline and Core PPI Inflation Monthly SA and 12 Months NSA ∆%

	Finished Goods SA Month	Finished Goods NSA 12 month	Finished Core SA Month	Finished Core NSA 12 months
Sep 2011	0.8	6.9	0.2	2.5
Aug	0.0	6.5	0.1	2.5
Jul	0.2	7.2	0.4	2.5
AE ∆% Jul-Sep	4.1		2.8
Jun	-0.1	7.0	0.3	2.3
May	0.1	7.1	0.1	2.1
AE ∆% May-Jul	0.8		3.3
Apr	0.8	6.6	0.3	2.2
Mar	0.7	5.6	0.3	2.0
Feb	1.5	5.4	0.2	1.9
Jan	1.0	3.6	0.5	1.6
AE ∆% Jan-Apr	17.3		5.3
Dec 2010	0.9	3.8	0.2	1.4
Nov	0.5	3.4	0.0	1.2
Oct	0.6	4.3	-0.3	1.6
Sep	0.3	3.9	0.2	1.6
Aug	0.6	3.3	0.1	1.3
Jul	0.1	4.1	0.2	1.5
Jun	-0.3	2.7	0.1	1.0
May	-0.2	5.1	0.2	1.3
Apr	-0.1	5.4	0.1	0.9
Mar	0.7	5.9	0.2	0.9
Feb	-0.4	5.4	0.0	0.9
Jan	1.1	3.6	0.3	1.0

Note: Core: excluding food and energy; AE: annual equivalent

Source: US Bureau of Labor Statistics

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

The US producer price index NSA from 2001 to 2011 is shown in Chart 22. There are two episodes of decline of the PPI during recessions in 2001 and in 2008. Barsky and Kilian (2004) consider the 2001 episode as one in which real oil prices were declining when recession began. Recession and the fall of commodity prices instead of generalized deflation explain the behavior of US inflation in 2008.

Chart 22, US, Producer Price Index, NSA, 2001-2011

Source: US Bureau of Labor Statistics

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

The 12 months rates of change of the PPI NSA from 2001 to 2011 are shown in Chart 23. It may be possible to forecast trends a few months in the future but turning points are almost impossible to anticipate especially when related to fluctuations of commodity prices in response to risk aversion. In a sense, monetary policy has been tied to behavior of the PPI in the negative 12 months rates in 2001 to 2003 and then again in 2009 to 2010. Monetary policy following deflation fears caused by commodity price fluctuations would introduce significant volatility and risks in financial markets and eventually in consumption and investment.

Chart 23, US, Producer Price Index, 12 Month Percentage Change NSA, 2001-2011

Source: US Bureau of Labor Statistics

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

The US PPI excluding food and energy from 2001 to 2011 is shown in Chart 24. There is here again a smooth trend of inflation instead of prolonged deflation as in Japan.

Chart 24, US, Producer Price Index Excluding Food and Energy, NSA, 2001-2011

Source: US Bureau of Labor Statistics

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

The 12 months rates of percentage change of the producer price index excluding food and energy are shown in Chart 25. Fluctuations replicate those in the headline PPI. There is an evident trend of increase of 12 months rates of core PPI inflation in 2011.

Chart 25, US, Producer Price Index Excluding Food and Energy, 12 Month Percentage Chance, NSA, 2001-2011

Source: US Bureau of Labor Statistics

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

The US producer price index of energy goods from 2001 to 2011 is in Chart 26. There is a clear upward trend with fluctuations that would not occur under persistent deflation.

Chart 26,US,Producer Price Index Energy Goods, NSA, 2001-2011

Source: US Bureau of Labor Statistics

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

Chart 27 provides 12 months rates of change of the producer price index of energy goods from 2001 to 2011. The episode of declining prices of energy goods in 2001 to 2002 is related to the analysis of decline of real oil prices by Barsky and Kilian (2004). Interest rates dropping to zero during the global recession explain the rise of the PPI of energy goods toward 30 percent. Bouts of risk aversion with policy interest rates held close to zero explain the fluctuations in the 12 months rates of PPI of energy goods in the expansion phase of the economy. Symmetric inflation targets induce significant instability in inflation and interest rates with adverse effects on financial markets and the overall economy.

Chart 27, US, Producer Price Index Energy Goods, 12 Month Percentage Change, NSA, 2001-2011

Source: US Bureau of Labor Statistics

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

Table 6 provides 12 month percentage changes of the CPI all items, CPI core and CPI housing from 2001 to 2011. There is no evidence in these data supporting symmetric inflation targets that would only induce greater instability in inflation, interest rates and financial markets.

Table 6, CPI All Items, CPI Core and CPI Housing, 12 Months Rates of Change, NSA 2001-2011

Sep	CPI All Items	CPI Core	CPI Housing
2011	3.9	2.0	1.8
2010	1.1	0.8	-0.3
2009	-1.3	1.5	-0.5
2008	4.9	2.5	3.5
2007	2.8	2.1	2.9
2006	2.1	2.9	4.1
2005	4.7	2.0	3.1
2004	2.5	2.0	2.8
2003	2.3	1.2	2.4
2002	1.5	2.2	2.3
2001	1.6	2.6	3.5

Source: US Bureau of Labor Statistics

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

IB Great Inflation and Unemployment Analysis. Stagflation in the 1970s, or incidence of the highest inflation rates in peacetime history with high rates of unemployment, is a major issue of research. The strands of thoughts are covered in subsections: IB1 “New Economics” and the Great Inflation, IB2 Counterfactual with Current Science, IB3 Policy Rule and Politics, IB4 Supply Shocks and IB5 Conclusion.

IB1 “New Economics” and the Great Inflation. The New Economics and the Great Inflation. The “new economics,” or in the words of James Tobin (1980, 27), the “neoclassical synthesis,” dominated policy thought in the 1960s and 1970s, as vigorously exposed by Heller (1966), Okun (1970) and Tobin (1972), all of whom served in the Council of Economic Advisers (CEA) (see http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html). According to Heller (1975, 16), the major event breaking with the past was the 1964 tax cut. The target of policy shifted to attaining the economy’s “full employment potential,” following canonical Keynesian economics, while rejecting analysis of structural unemployment.

Heller (1975, 17) reflected on the policy approach of Heller (1966):

“On one hand, the high employment, limited-recession economy forged with our macroeconomic policy tools is indeed an inflation-prone economy—the formula for successful management of high-pressure prosperity is far more elusive than the formula for getting there. Yet on the other hand, success bred great expectations on the part of the public that economics could deliver prosperity without inflation and with ever-growing material gains in the bargain. The message got through that we had ‘harnessed the existing economics…to the purposes of prosperity, stability and growth,’ and that as to the role of the tax cut in breaking old molds of thinking, ‘nothing succeeds like success’(Heller [1966])”.

There is an even more detailed account of the gap management by fiscal/monetary policies away from cyclical adjustment to growth promotion (Burns 1969QFE, 279):

“The central doctrine of this school is that the stage of the business cycle has little relevance to sound economic policy; that policy should be growth-oriented instead of cycle-oriented; that the vital matter is whether a gap exists between actual and potential output; that fiscal deficits and monetary tools need to be used to promote expansion when a gap exists; and that the stimuli should be sufficient to close the gap—provided significant inflationary pressures are not whipped up in the process.”

The “consensus macroeconomic framework, vintage 1970” used by “managers of aggregate demand” in stabilization policies is interpreted by Tobin (1980, 23-5) in terms of five broad components.

(1) The key role in determining the rate of inflation is played by the nonagricultural business sector in which prices consist of marked-up labor costs. The standard model is the “augmented Phillips curve.”

(2) The only way in which aggregate monetary demand, or nominal income, affects prices, output, wages and employment is through tightness in labor and product markets. Combinations of fiscal and monetary policies that result in the same change in aggregate demand have the same impact on inflation and real economic activity.

(3) Okun’s law or empirical finding is that (Okun 1962):

“In the postwar period, on the average, each extra percentage point in the unemployment rate above four percent has been associated with about a three percent decrement in real GNP”

The statement is careful in expressing the empirical result on the basis of the structure estimated with data of 55 quarters from IIQ1947 to IVQ1960, resulting in the estimated relation (Okun 1962):

Y = 0.30 – 0.30X (1)

Where Y is the quarterly change in the unemployment rate expressed in percentage points and X is the quarterly percentage change of real GNP. If GNP is unchanged from one quarter to the next, X =0, trend increases in productivity and growth of the labor force result in an increase of the rate of unemployment by 0.3 percentage points. Unemployment is 0.3 point lower for each increment of one percent of GNP (0.30 x X = 0.3 x 1). An increase of one percentage point in unemployment is equivalent to decrease of GNP by 3.3 percent (1/0.3).

(4) Tighter markets of products and labor at high employment rates result in acceleration of inflation above those incorporated in inflation expectations and historical trends. Slack in product and labor market causes deceleration of inflation but at a slower rate. The utilization of resources and market tightness at the natural rate of unemployment of Friedman (1968) and Phelps (1968) does not cause upward or downward pressure of wages and prices relative to expected paths. The consensus accepted a nonaccelerating inflation rate of unemployment (NAIRU) but with divergence on whether it coincided with equilibrium or optimum employment.

(5) There was no widespread consensus on the instruments of demand management.

Tobin (1980, 19) explained more accurately (see also Tobin 1980AA and Lucas 1981):

“Higher inflation, higher unemployment-the relentless combination frustrated policymakers, forecasters, and theorists throughout the decade. The disarray in diagnosing stagflation and prescribing a cure makes any appraisal of the theory and practice of macroeconomic stabilization as of 1980 a foolhardy venture.”

There are three interpretations of the role of monetary policy in causing the Great Inflation and Unemployment: (1) inflation surprise, (2) inadvertent policy mistake; and (3) imperfect information (for ample discussion see http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html).

(1) Inflation Surprise. The analysis by Kydland and Prescott (1977, 447-80, equation 5) uses the “expectation augmented” Phillips curve with the natural rate of unemployment of Friedman (1968) and Phelps (1968), which in the notation of Barro and Gordon (1983, 592, equation 1) is:

U_t = Uⁿ_t – α(π_t – π^e) α > 0 (2)

Where U_t is the rate of unemployment at current time t, Uⁿ_t is the natural rate of unemployment, π_t is the current rate of inflation and π^e is the expected rate of inflation by economic agents based on current information. Equation (2) expresses unemployment net of the natural rate of unemployment as a decreasing function of the gap between actual and expected rates of inflation. Equation (2) is used by Barro and Gordon (1983) in showing the temptation of the policymaker to create “inflation surprises” by pursuing an inflation rate that is higher than that expected by economic agents which lowers the difference between the actual and natural unemployment rate by the term – α(π_t – π^e).

(2) The baseline monetary policy rule considered by Clarida, Galí and Gertler (2000) (CGG) is a simple linear equation:

r*_t = r* + β(inflation gap) + γ(output gap) (3)

Where r*_t is the Fed’s target rate for the fed funds rate in period t, r* is the desired nominal rate corresponding to both inflation and output being at their target levels (CGG 2000, 150), (inflation gap) is the deviation of actual inflation from target inflation and (output gap) is the percentage difference between actual GDP and its target. The rule is forward looking because the two gaps are relative to future desired levels. A second monetary rule is on the implied relation for the real rate of interest target:

rr*_t = rr* + (β -1)(inflation gap) + γ(output gap) (4)

Where rr*_t is the ex ante real rate target and rr* = r* - π* is the long-run equilibrium real rate. Equation (4) shows that the response of policy to the inflation gap depends on whether β is greater or less than one and the response to the output gap on whether γ is positive or negative. The data reveal that the Fed reacted weakly to expectations of inflation by allowing declines in real rates of interest or raising nominal interest but not by enough to increase real interest rates. That is, policy neglected control of the inflation gap and focused instead on the output gap.

(3) Orphanides (2003, 2004) emphasizes the erroneous measurement of potential output, and a consequence of the output gap in equation (4), which misled the regulators in pursuing an “activist” policy of trying to prevent the output gap from increasing when it was decreasing. The policy to prevent the erroneously measured output gap from increasing was lowering interest rates but the actual gap was actually tightening and inflation control required higher interest rates.

IB2 Counterfactual with Current Science. The dual mandate of the Fed consists of “conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates” (http://www.federalreserve.gov/aboutthefed/mission.htm). In practice, the Fed has the challenging task of attaining two often conflicting targets: (1) reducing the gap of actual relative to potential output while simultaneously (2) controlling inflation at the target of 2 percent. Conventional monetary policy has one instrument, the fed funds rate, with which the Fed attempts to influence the current short-term interest rates and the term-structure of interest rates, which consists of the rates from one period in the future toward another future period, as for example, the rate at six months from now for investment six months forward or one year from now. Unconventional monetary policy consists of large-scale purchases of long-term securities with the objective of lowering yields on long-term securities that are closely related to borrowing costs for investment and consumption of durable goods.

Empirical economics typically faces counterfactuals. A counterfactual consists of using economic theory and measurement in evaluating what would have been the level and time path of critical economic variables if events and/or policies would have been different. Counterfactuals face not only tough hurdles of choice of appropriate theory in analyzing the issue in question but also availability of relevant data and measurement methods. Economic observations consist of data with mixed effects of what actually happened. Resolution of the counterfactual would require unobserved data of what would have happened under different events and/or policies.

The Great Inflation and Unemployment suggests two critical counterfactuals.

First, there is the counterfactual of what would have happened if policy during the early phase of creating the Great Inflation would have been similar to recent and current monetary policy. DeLong (1997) finds the onset of the Great Inflation in the 1960s. Table 7 shows the section of Table I1 in Appendix I The Great Inflation for the period 1960 to 1970. A counterfactual of the 1970s immediately rises out of Table 7, which consists of simulating current monetary and fiscal policies in doses much more aggressive than in the 1960s and 1970s proposed as a true rose garden without thorns (http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html). What would have been the Great Inflation and Unemployment if the Federal Reserve would have lowered interest rates to zero in 1961, in fear of deflation because of 0.7 percent CPI inflation, and purchased the equivalent of 30 percent of the Treasury debt in long-term securities, subsequently engaging in quantitative easing II in 1964 after CPI inflation of 1.0 percent? The counterfactual would not be complete without including the unknown path of the US debt, tax and interest rate increases to exit from unsustainable debt and the largest monetary accommodation in US history.

Table 7, US Annual Rate of Growth of GDP and CPI and Unemployment Rate 1960-1967

	∆% 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

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

Second, economists believe that their knowledge of monetary policy has evolved into a more accurate science of optimal control. Orphanides and Williams (2010) pose and analyze the critically-important counterfactual of what would have happened if the Fed in the 1960s had the current science of central banking, availability in real time of correctly measured output gaps and the natural rate of unemployment and more balanced policy of inflation control instead of nearly exclusive emphasis on output gap reduction. The understanding of the Great Inflation has been enriched by their definition of the counterfactual issue and its importance, analysis and empirical method.

The counterfactual issue searched by Orphanides and Williams (2010, 1) is: “what monetary policy framework, if adopted by the Federal Reserve, would have avoided the Great Inflation of the 1960s and 1970s?” The structural model used by Orphanides and Williams (2010, 15-6) consists of two equations to model the unemployment rate and the inflation rate. The unemployment rate equation is:

u_t = ϕ_uu^e_t₊₁ + (1- ϕ_u)u_t_-1 + α_u(i^e_t – π^e_t₊₁ – r*) + v_t (5)

v_t = ρ_vv_t_-1 + e_v_,t with e_v ~ N(0, σ²_ev) (6)

Equation (5) expresses the current rate of unemployment, u_t, by means of three terms: (a) the effect the rate of unemployment expected to prevail in the next period, ϕ_uu^e_t₊₁; (b) the effect of the unemployment rate in the past period, (1- ϕ_u)u_t_-1; and (c) term α_u(i^e_t – π^e_t₊₁ – r*) which is the difference between the expected nominal short-term interest rate, i^e_t, and the rate of inflation expected in the next period, π^e_t₊₁, or expected ex-ante real rate of interest r^e_t, and the natural rate of interest, that is (i^e_t - π^e_t₊₁ - r*) = r^e_t - r*.

Orphanides and Williams (2010, 16) use a Phillips equation following a New Keynesian approach with indexation:

π_t = ϕ_ππ^e_t₊₁ + (1-ϕ_π)π_t_-1 + α_π(u_t – u*_t) + e_π,t

with e_π ~ N(0, σ²_e_π) (7)

The Phillips curve in equation (7) expresses the current rate of inflation, π_t, by three effects: (a) the influence of the rate of inflation expected to prevail in next period t+1, or effect ϕ_ππ^e_t₊₁; (b) indexation that is captured by an effect of inflation in the prior period (1-ϕ_π)π_t_-1; and (c) an effect of the difference between the actual rate of unemployment, u_t, and the natural rate of unemployment, u*_t, captured by the term α_π(u_t – u*_t).

Optimal control (OC) policy consists in the central bank choosing the policy instrument to minimize the central bank’s loss function subject to the constraints of the central bank’s model (Orphanides and Williams 2010, 19; see Orphanides and Williams 2008, 2009; Bean 2003; Bean et al 2010; Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 110-6). The OC policy rule is obtained by assuming the central bank knows all parameters and economic agents decide on rational expectations. The loss function used by Orphanides and Williams (2010) is:

ℓ = Var (π -2) + λVar(u – uⁿ) + γVar(∆(i)) (8)

The central bank minimizes the variance of the inflation rate, π, less the inflation target of 2 percent, Var (π -2), plus the variance of the difference between the actual unemployment rate, u, less the natural rate of unemployment, uⁿ, plus the variance of the first difference of the nominal interest rate, (∆(i), or γVar(∆(i)). The emphasis on reduction of the output gap can be captured by alternative values of the parameter λ in equation (8) such as 16, 4 and 1.

The narrative of policy during the 1960s and 1970s by Orphanides and Williams (2010, 31) leads them to conclude that:

“Our narrative account of the Great Inflation squarely attributes the policy failures on mistakes consistent with what was viewed by many to be the latest advances in macroeconomics as embodied in the New Economics. The fine-tuning approach to monetary policy, with its emphasis on stabilizing the level of real activity, might have succeeded if policy makers had possessed accurate real-time assessments of the natural rate of unemployment. In the event, they did not and they failed to account for their imperfect information regarding the economy’s potential and the effects of these misperceptions on the evolution of expectations and inflation. Price and economic stability were only restored after the Federal Reserve, under Chairman Volcker, refocused policy on establishing and maintaining price stability.”

The quantitative research shows that modern OC policy would not have performed much better if the Fed had misperceptions of the natural rate of unemployment, resulting in failure to anchor inflation expectations that would have generated volatile inflation. OC policy would have been successful only with moderate weight on output gap stabilizing with the best results obtained with almost all weight on price stabilization.

IB3 Policy Rule and Politics. The objective of Levin and Taylor (2009) is to reveal the primary cause of the persistence of inflation drift during the Great Inflation by focusing on the path of inflationary expectations to model monetary policy from 1965 to 1980. They derive three stylized facts by use of measurements of inflation expectations. (1) Inflation began in the mid 1960 while it had been contained since the late 1950s at around 1 percent but inflation expectations accelerate beginning in 1965. (2) Long-term inflation expectations stabilized at a high level in the first half of the 1970s but catapulted toward the end of the decade. (3) Long-run inflation expectations only began to decline at the end of 1980. The central bank reaction function analyzed by Taylor (1993, 202, equation (1)) on the basis of prior research is:

r = p +0.5y + 0.5(p-2) + 2 (9)

In equation (9), the federal funds rate, r, is expressed in terms of the rate of inflation over the previous four quarters, the percentage output gap, y, defined as 100(Y-Y*)/Y*, where Y is actual GDP, Y* is trend real GDP (2.2 percent from IQ1984 to IIIQ1992), and the deviation of inflation from the target of 2 percent, 0.5(p-2). The Taylor policy rule in equation (9) triggers an increase in the fed funds rate when inflation exceeds 2 percent or when GDP exceeds trend GDP. If GDP is equal to target, y = 0, and inflation is also equal to target, p = 2, then the real rate of interest as measured by prior inflation, r-p, equal 2 percent. The fed funds rate calculated with this simple policy rule fits remarkably well the actual fed funds rate in 1987-1992 (Taylor 1993, 204, Figure 1).

The simple rule is restated by Levin and Taylor (2010, 16, equation (1)) to account for discrete shifts in the intercept:

r_t = r’ + γ_π(π_t – π*) + γ_y(y_t – y*_t) (10)

Equation (10) expresses the short-term real interest rate, r_t, in terms of an effect, γ_π(π_t – π*), of the difference between actual inflation, π_t, and the central’s bank objective for inflation, π*, and an effect, γ_y(y_t – y*_t), of the deviation of actual output, y_t, from trend or steady-state output, y*_t, and r’ stands for the steady-state value of the real rate of interest.

Equation (10) is shown by Levin and Taylor (2010) to provide a good fit of experience during the Great Inflation by allowing for shifts in the central bank’s inflation objective π*. Monetary policy during the Great Inflation can be interpreted by three stop-start events occurring in 1968-70, 1974-76 and 1979-80. Levin and Taylor (2010) conclude that in all three “stop and go” episodes monetary policy “fell behind the curve,” permitting rising inflation before belated tightening and abandoning tightening because of the contraction before inflation was reduced to the level before the event. Lags in effect of monetary policy have been amply discussed in the literature and may have proved important in falling behind the curve (see Culbertson 1960, Friedman 1961, Culbertson 1961, Batini and Nelson 2002 and Romer and Romer 2004).

IB4 Supply Shocks. It is difficult to analyze oil price shocks as exogenous determinants of the US economy as Barsky and Kilian (2004) find in an “idiosyncratic” survey of vast literature and data (see Barksy and Kilian 2001). The Great Inflation actually began in the 1960s before the oil price shocks of the 1970s (De Long 1997). Barsky and Killian (2004) analyze five oil shocks with reference of the business cycle dates of the NBER, finding a variety of relations with the aggregate US economy that do not permit a simple link between increases in oil prices and US inflation.

The “Great Inflation” is relabeled by Blinder (1979, 1982) and Blinder and Rudd (2010) as the “Great Stagflation.” The important behavior to be explained is not the drift of inflation but the occurrence of “two episodes of ‘double-digit’ inflation: 1974 and 1979-80” with “many parallels between the 1973-75 period and the 1978-80 period” (Blinder 1982, 261). The issues and analysis of Blinder (1979, 1982) and Blinder and Rudd (2010) are relevant to the views on inflation by the Federal Open Market Committee (FOMC). There are four propositions in the supply shock explanation of the Great Inflation (Blinder and Rudd 2010, 1; Blinder 1982, 262-3). (1) Aggregate demand and aggregate supply determine the economy’s underlying or “core” inflation; headline inflation tends to converge to core inflation. (2) There are multiple factors affecting aggregate demand but not exclusively monetary and fiscal policy; the growth rate of productivity in the long term is the main driving factor of supply but supply shocks restricting aggregate supply can prevail in the short run. (3) The core inflation rate excluding energy and food is a proxy for the rate of inflation of all inflation components other than food and energy. (4) Changes in food and energy prices can temporarily cause headline inflation to deviate from core inflation but there could be other factors such as relaxing wage-price controls in 1974.

Supply shocks affect the capacity of firms in producing GDP, directly affecting prices or quantities of productive inputs and technology. Spending by households, business and government in purchasing GDP originates in demand shocks. An appeal to the aggregate demand and aggregate supply diagram in (y, p) space, y being output and p the price level, explains the difference between supply and demand shocks. Assume aggregate demand is downward sloping and unaltered while upward sloping supply shifts upwardly to the left. There is a higher price level as p moves upward and to the left along the demand curve together with a lower output as y moves toward the origin. The restricting supply shock causes inflation and lower output. An upward shift of demand, say by fiscal/monetary policy, is an upward movement along an upwardly sloping supply curve, resulting in both a higher price level and higher output. The demand shock produces an increase in inflation and output. Restrictive fiscal/monetary policy is an inward movement resulting in lower prices and also lower output. Blinder and Rudd (2010) seek to explain (1) the factors that caused two “inflation hills” in 1973-74 and 1978-80; and (2) the contractions of economic activity and rising unemployment. That is the reason for referring to the 1970s as the “Great Stagflation.”

The actual rise in inflation in 1973-74 was 6 percent. The measurements by Blinder and Rudd (2010, 48) find that energy prices contributed 2.5 percent, food prices 3.5 percent, pass-through of food and energy prices 1.5 percent and the end of the Nixon price controls 2 percent for total 9.5 percent. The actual rise in inflation in 1978-80 was 4 percent. The contributions in the findings of Blinder and Rudd (2010, 48) for 1979-80 are: energy prices 2 percent, food prices 2 percent and pass-through of food and energy prices 2.25 percent for total 6.25 percent. Supply shocks explain more inflation than what occurred without allowing for demand shocks. The “inflation hills” were followed by collapse of headline inflation faster than core inflation because the supply-shocks that caused them disappeared. These calculations also imply that about 60 percent of the increase in unemployment in the 1973-75 recession and about 45 percent in the double-dip recessions of 1980-82 are explained by supply shocks.

IB5 Conclusion. There was “bad policy” that perpetuated the Great Inflation drift in the form of a “central bank that seeks to maintain output at a capacity level which varies through time and also places continuity of the short-term interest rate,” as found by Goodfriend and King (2009, 23). There was also “bad luck” in the form of slowing productivity growth when the inflation rate accelerated. Goodfriend and King (2009, 23) conclude:

“One reason for studying the Great Inflation is to prevent its recurrence. Our interpretation of the period suggests that a preoccupation with short-term interest rates and with maintaining output at capacity would, in the presence of adverse shocks to the growth of capacity output, combine to produce another period of inflation drift with similarly adverse consequences for employment and output.”

There are elements of truth in all the analyses of the Great Inflation and Underemployment. As Goodfriend and King (2009, 23) propose: “an important task of future research is to distinguish empirically between competing theories.” DeLong (1997) and Levin and Taylor (2009) analyze the political unwillingness to control inflation. Meltzer (2005, 145) also finds a major role for politics:

“The Great Inflation of 1965 to the mid-1980s was the central monetary event of the latter half of the 20th century. Its economic cost was large. It destroyed the Bretton Woods system of fixed exchange rates, bankrupted much of the thrift industry, heavily taxed the U.S. capital stock, and arbitrarily redistributed income and wealth. It was also a political event, as are all major policy issues. This paper argues that the Great Inflation cannot be understood fully without its political dimension. Political pressure to coordinate policy reinforced widespread beliefs that coordination of fiscal and monetary policies was desirable.”

II World Financial Turbulence. The past three months have been characterized by financial turbulence, attaining unusual magnitude in the past month. Table 8, updated with every comment in this blog, provides beginning values on Oct 17 and daily values throughout the week ending on Fr Oct 21 of several financial assets. Section V 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 Oct 14 and the percentage change in that prior week below the label of the financial risk asset. The first five asset rows provide five key exchange rates versus the dollar and the percentage cumulative appreciation (positive change or no sign) or depreciation (negative change or negative sign). Positive changes constitute appreciation of the relevant exchange rate and negative changes depreciation. Financial turbulence has been dominated by reactions to the new program for Greece (see section IB in http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html), doubts on the larger countries in the euro zone with sovereign risks such as Spain and Italy, the growth standstill recession and long-term unsustainable government debt in the US, worldwide deceleration of economic growth and continuing inflation. The dollar/euro rate is quoted as number of US dollars USD per one euro EUR, USD 1.387/EUR in the first row, first column in the block for currencies in Table 8 for Fri Oct 14, appreciating to USD 1.3739/EUR on Mon Oct 17, or by 0.9 percent. Table 8 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 8 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 1.3739/EUR on Oct 17; 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 Oct 14, to the last business day of the current week, in this case Fri Oct 21, such as depreciation of 0.1 percent for the dollar to USD 1.389/EUR by Oct 21; and the third row provides the percentage change from the prior business day to the current business day. For example, the USD depreciated (negative sign) by 0.1 percent from the rate of USD 1.387/EUR on Fri Oct 14 to the rate of USD 1.389/EUR on Fri Oct 21 {[(1.389/1.387) – 1]100 = 0.1%} and depreciated by 0.7 percent from the rate of USD 1.3793 on Thu Oct 20 to USD 1.389/EUR on Fri Oct 21 {[(1.389/1.3793) -1]100 = 0.7%}. The dollar depreciated during the week because more dollars, $1.389, were required to buy one euro on Fri Oct 21 than $1.387 required to buy one euro on Fri Oct 14. The depreciation of the dollar in the week was caused by diminishing risk aversion with purchases of risk financial investments by reduction of dollar-denominated assets.

Table 8, Weekly Financial Risk Assets Oct 17 to Oct 21, 2011

Oct 14, 2011

M 17

Tu 18

W 19

Th 20

Fr 21

USD/
EUR

1.387

-3.7%

1.3739

0.9%

1.3767

0.7%

-0.2%

1.3751

0.8%

0.1%

1.3793

0.6%

-0.3%

1.389

-0.1%

-0.7%

JPY/
USD

77.21

-0.7%

76.8235

0.5%

76.8445

0.5%

-0.02%

76.82

0.5%

0.03%

76.79

0.5%

0.04%

76.261

1.2%

0.7%

CHF/
USD

0.894

2.3%

0.8993

-0.6%

0.8985

-0.5%

0.1%

0.9033

-1.0%

-0.5%

0.898

-0.4%

0.6%

0.8825

1.3%

1.7%

CHF/EUR
1.2388

0.3%

1.2355

0.3%

1.2369

0.2%

-0.1%

1.2422

-0.3%

-0.4%

1.2328

0.5%

0.8%

1.2263

1.0%

0.5%

USD/
AUD

1.0338

0.9673

1.0%

1.0171

0.9832

-1.6%

1.0284

0.9724

-0.5%

1.1%

1.0222

0.9783

-1.1%

-0.6%

1.023

0.9775

-1.1%

0.1%

1.0375

0.9639

0.4%

1.4%

10 Year
T Note

2.251

2.160

2.175

2.16

2.19

2.22

2 Year T Note
0.269

0.258

0.27

0.274

0.26

0.27

German Bond

2Y 0.66

10Y 2.20

2Y 0.58 10Y 2.10

2Y 0.58 10Y 2.01

2Y 0.62 10Y 2.06

0.59

10Y 2.00

2Y 0.66 10Y 2.11

DJIA

11644.49

4.9%

-2.1%

-0.6%

1.6%

-1.2%

-0.6%

-0.9%

0.3%

1.4%

2.3%

DJ Global

1845.80

5.1%

-1.2%

0.04%

-1.1%

0.1%

-2.2%

-1.1%

0.1%

2.3%

DJ Asia Pacific

1199.34

3.3%

2.0%

-0.3%

-2.3%

0.5%

0.8%

-1.3%

-1.8%

-0.7%

0.6%

Nikkei
8747.96

1.7%

1.5%

-0.1%

-1.6%

0.3%

0.4%

-0.8%

-1.0%

-0.8%

0.0%

Shanghai

2431.37

3.1%

0.4%

-1.9%

-2.3%

-2.2%

-0.3%

-4.1%

-1.9%

-4.7%

-0.6%

DAX
5967.20

5.1%

-1.8%

-1.5%

0.3%

-0.9%

0.6%

-3.4%

-2.5%

0.1%

3.6%

DJ UBS Comm.

148.21

4.5%

-0.7%

-0.9%

-0.2%

-2.2%

-1.3%

-3.2%

-1.0%

-2.2%

1.1%

WTI $ B
87.31

5.2%

86.44

-0.9%

88.40

1.2%

2.3%

86.07

-1.4%

-2.6%

86.33

-1.1%

0.3%

87.40

0.1%

1.2%

Brent $/B

112.75

6.3%

109.98

-2.5%

111.41

-1.2%

1.3%

108.55

-3.7%

-2.6%

109.70

-2.7%

1.1%

109.56

-2.8%

-0.1%

Gold $/OZ

1682.6

2.6%

1673.2

-0.6%

1664.3

-1.1%

-0.5%

1643.4

-2.3%

-1.2%

1617.3

-3.9%

-1.6%

1636.10

-2.8%

1.2%

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

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

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

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

There was again turbulence in financial assets in the expectation of a bank and debt deal to be approved at the meeting of European leaders on Oct 23 to be concluded on Oct 26. Risk aversion is manifested by strength of the dollar, yen and Swiss franc with investors fleeing risk financial assets for the lower return but safe haven of stronger sovereign risks. Risk aversion is present in the cumulative appreciation of the dollar by 0.8 percent on Wed Oct 19 that was reversed by depreciation of 0.7 percent on Fri Oct 21 with cumulative minor appreciation in the week of 0.1 percent. Risk aversion is also evident in the appreciation of the yen by 1.2 percent by Fri Oct 21. The yen traded again below JPY 76/USD during market hours on Fri Dec 21. Continuing strength of the Japanese yen suggests remaining risk aversion. Exchange rate controls by the Swiss National Bank (SNB) fixing the rate at a minimum of CHF 1.20/EUR (http://www.snb.ch/en/mmr/reference/pre_20110906/source/pre_20110906.en.pdf) has prevented flight of capital into the Swiss franc. The Swiss franc appreciated 1.3 percent relative to the USD and 1.0 percent relative to the euro also suggesting remaining risk aversion. Another symptom of risk aversion is the depreciation of the Australian dollar by cumulative 1.1 percent on Thu Oct 20, which was reversed with appreciation of 1.4 percent on Fri Oct 21 for cumulative appreciation of 0.4 percent. Risk appetite would be revealed by carry trades from zero interest rates in the US and Japan into high yielding currencies such as in Australia with appreciation of the Australian dollar (see Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 202-4, Pelaez and Pelaez, Government Intervention in Globalization (2008c), 70-4).

Risk aversion is captured by flight of investors from risk financial assets to the government securities of the US and Germany. Risk aversion is captured by stability of the yield of the 10-year Treasury note of 2.22 percent on Oct 21 only slightly lower than 2.251 on Fri Oct 14. The 10-year Treasury yield is still at a level well below consumer price inflation of 3.9 percent in the 12 months ending in Sep and 0.3 percent in Sep relative to Aug (http://www.bls.gov/cpi/). Treasury securities continue to be safe haven for investors fearing risk but with concentration in shorter maturities such as the two-year Treasury with relatively stable yield of 0.27 percent on Oct 21 while the ten-year Treasury yield has risen to 2.22 percent by Oct 21 because of duration risk. Rising yields of longer term securities can cause higher capital losses. Investors are willing to sacrifice yield relative to inflation in defensive actions to avoid turbulence in valuations of risk financial assets but may be managing duration more carefully. During the financial panic of Sep 2008, funds moved away from risk exposures to government securities. A similar risk aversion phenomenon occurs in Europe with low levels of the yield of the 10-year government bond of Germany on Fri Oct 7 at 0.66 percent for the two-year maturity and 2.11 percent for the 10-year maturity while the final estimate of euro zone CPI inflation for Sep is at 3.0 percent (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-14102011-BP/EN/2-14102011-BP-EN.PDF). Safety overrides inflation-adjusted yield but there could be duration aversion.

World equity markets traded cautiously during the week in the uncertainty of the final deal of the bank and sovereign debt deal. The DJIA oscillated during the week but ended with a jump of 2.3 percent on Fri Oct 21 and cumulative gain for the week of 1.4 percent. Recession is nowhere in short-term indicators of the overall US economy and companies are supporting earnings with continuing cost restraint. The DJ global gained 0.1 percent in the week because of the jump by 2.3 percent on Fri Oct 21 with strong gains of the DJIA of 2.3 percent and Germany Dax of 3.6 percent. In the oscillating markets Dax gained only 0.1 percent in the week. China’s Shanghai Composite lost 4.7 percent in the week even after reporting strong economic data. The Nikkei Average lost 0.8 percent in the week and the DJ Asia Pacific dropped 0.7 percent.

Commodities were weak in the week. The DJ UBS Commodities index dropped 2.2 percent cumulatively even after gaining 1.1 percent on Fri Oct 21. The sharp decline in stocks of crude oil and gasoline contributed to some strength in WTI with a gain of 1.2 percent on Fri Oct 21 but with marginal gain of only 0.1 percent during the week. Risk aversion in expectation of the bank/debt deal in Europe also plagued commodities markets. Brent was less fortunate dropping 2.8 percent in the week. Gold lost ground consistently during the week, ending with a weekly loss of 2.8 percent even after increasing 1.2 percent on Fri Oct 21.

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

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

2. United States Growth, Employment and Fiscal Soundness. Recent posts of this blog analyze the mediocre rate of growth of the US in contrast with V-shaped recovery in all expansions following recessions since World War II, deterioration of social and economic indicators, unemployment and underemployment of 30 million, decline of yearly hiring by 17 million, falling real wages and unsustainable central government or Treasury debt (http://cmpassocregulationblog.blogspot.com/2011/10/us-growth-standstill-at-08-percent.html http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html).

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

Standard & Poor’s Rating Services (2011Oct13) downgraded on Oct 13 the long-term rating of Spain from ‘AA’ to ‘AA-,’ affirming the short-term rating of ‘A-1+.’ The drivers of the downgraded are: (1) uncertainty of Spain’s growth because of the needs of access to foreign credit by the Spanish private sector with high level of existing debt and facing higher external borrowing costs; (2) probability of deterioration of assets of the financial system; and (3) continuing high unemployment because of incomplete reform of labor markets. Moody’s Investors Service (2011Oct18) downgraded the government bond ratings of Spain from Aa2 to A1 with negative outlook. Moody’s finds three main drivers for the downgrade: (1) vulnerability of Spain to market and event risks because of the lack of definitive solution to the sovereign credit risk crisis and the large borrowing needs of Spain; (2) reduction of growth prospects for Spain estimated now by Moody’s at 1.0 percent in 2012; and (3) difficulties of Spain in attaining fiscal targets complicated now by lower growth prospects. Moody’s Investors Service (2011Oct17) finds France’s Aaa rating in stable outlook based on the strength of the economy, institutions and government finances. Moody’s annual credit report on France finds deterioration of French government debt conditions that are the weakest of other countries with Aaa rating.

Quentin Peel, Peter Spiegel and Hugh Carney, writing on Oct 23, 2011, on “Pressure on Italy in eurozone struggle,” published in the Financial Times (http://www.ft.com/intl/cms/s/0/c39e07f0-fd98-11e0-b6d9-00144feabdc0.html#axzz1bVlVmY6d) analyze the options for resolution of the sovereign debt crisis of the euro zone by the leaders of European countries late on Sunday, Oct 23. There is already agreement on the need to increase capital of European banks by €108 billion in order to persuade financial markets that banks are sufficiently capitalized. Discussions center on two different plans to increase the €440 billion already approved in Jul for the European Financial Stability Facility (EFSF) (1) by means of leverage obtained from global investors; and (2) an insurance fund guaranteeing losses of bondholders. There were simultaneous discussions with international banks to increase participation in Greece’s bailout plan that would reduce debt to more manageable levels. The final decision will be taken in a joint meeting of the euro zone and the European Union on Wed Oct 26.

IV Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table 9 updated with every post, provides the latest annual data for GDP, consumer price index (CPI) inflation, producer price index (PPI) inflation and unemployment (UNE) for the advanced economies, China and the highly-indebted European countries with sovereign risk issues. The table now includes the Netherlands and Finland that with Germany make up the set of northern countries in the euro zone that hold key votes in the enhancement of the mechanism for solution of the sovereign risk issues (http://www.ft.com/cms/s/0/55eaf350-4a8b-11e0-82ab-00144feab49a.html#axzz1G67TzFqs). Newly available data on inflation is considered below in this section. The data in Table 9 for the euro zone and its members is updated from information provided by Eurostat but individual country information is provided in this section as soon as available, following Table 9. Data for other countries in Table 9 is also updated with reports from their statistical agencies. Economic data for major regions and countries is considered in Section IV World Economic Slowdown following with individual country and regional data tables.

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

	GDP	CPI	PPI	UNE
US	1.6	3.8	6.5	9.1
Japan	-1.1	0.2	2.5	4.4
China	9.6	6.1	6.5
UK	1.8	5.2* RPI 5.6	6.3* output 17.5* input 13.3**	8.1
Euro Zone	1.6	3.0	5.9	10.0
Germany	2.8	2.9	5.4	6.0
France	1.6	2.4	6.3	9.9
Nether-lands	1.5	3.0	7.7	4.4
Finland	2.7	3.5	7.5	7.8
Belgium	2.5	3.4	7.1	6.8
Portugal	-0.9	3.5	5.5	12.3
Ireland	-1.0	1.3	4.7	14.6
Italy	0.8	3.6	4.8	7.9
Greece	-4.8	2.9	7.4	15.1
Spain	0.7	3.0	7.1	21.2

Notes: GDP: rate of growth of GDP; CPI: change in consumer price inflation; PPI: producer price inflation; UNE: rate of unemployment; all rates relative to year earlier

*Office for National Statistics

PPI http://www.ons.gov.uk/ons/dcp171778_233900.pdf

CPI http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/september-2011/index.html

** Excluding food, beverage, tobacco and petroleum

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

There are two categories of responses in the Empire State Manufacturing Survey of the Federal Reserve Bank of New York (http://www.newyorkfed.org/survey/empire/oct2011.pdf): current conditions and expectations for the next six months. There are responses in the survey for two types of prices: prices received or inputs of production and prices paid or sales prices of products. Table 10 provides the responses and indexes for the two categories and within them for the two types of prices for May to Oct of 2011. Current prices paid were rising at an accelerating rate in May but the rate of increase has dropped significantly as shown by the decline in the index from 68.89 in May to 22.47 in Oct. The index fell in every month from May to Aug and then again in Oct relative to Sep. The index of current prices received also fell sharply from 27.96 in May to 4.49 in Oct, meaning that prices are increasing at a moderate rate. Responses of no change in prices received dominate with 79.78 percent in Oct. In the expectations for the next six months, the index of prices paid has also declined from 68.82 in May to 40.45 in Oct but there are still a high percentage of 47.19 percent of responses expecting rising prices. The index of expectations for the next six months of prices received has also fallen from 35.48 in May to 17.98 in Oct with 61.80 percent expecting no change in prices paid.

Table 10, US, FRBNY Empire State Manufacturing Survey, Prices Paid and Prices Received, SA

	Higher	Same	Lower	Index
Current
Prices Paid
May	69.89	30.11	0.00	69.89
Jun	58.16	39.80	2.04	56.12
Jul	47.78	47.78	4.44	43.33
Aug	34.78	58.70	6.52	28.26
Sep	34.78	63.04	2.17	32.61
Oct	29.21	64.04	6.74	22.47
Prices Received
May	33.33	61.29	5.38	27.96
Jun	17.35	76.53	6.12	11.22
Jul	14.44	76.67	8.89	5.56
Aug	15.22	71.74	13.04	2.17
Sep	17.39	73.91	8.70	8.70
Oct	12.36	79.78	7.87	4.49
Six Months
Prices Paid
May	70.97	26.88	2.15	68.82
Jun	58.16	38.78	3.06	55.10
Jul	56.67	37.78	5.56	51.11
Aug	46.74	48.91	4.35	42.39
Sep	54.35	44.57	1.09	53.26
Oct	47.19	46.07	6.74	40.45
Prices Received
May	40.86	53.76	5.38	35.48
Jun	30.61	58.16	11.22	19.39
Jul	38.89	52.22	8.89	30.00
Aug	23.91	67.39	8.70	15.22
Sep	33.70	55.43	10.87	22.83
Oct	28.09	61.80	10.11	17.98

Source: http://www.newyorkfed.org/survey/empire/sep2011.pdf

http://www.newyorkfed.org/survey/empire/july2011.pdf

http://www.newyorkfed.org/survey/empire/aug2011.pdf

Current prices for the Oct survey the Business Outlook index of the Federal Reserve Bank of Philadelphia in Table 11 are showing increases with the exception of prices received. The decline in prices paid index from 23.2 in Sep to 20.0 in Oct has equal responses of no change in prices of 51.8 percent while responses of increase in prices rise from 28.9 percent in Sep to 30.6 percent in Oct and responses of no change in prices increase from 5.7 percent in Sep to 10.6 percent in Oct. The index of prices received falls from 0.9 in Sep to minus 2.5 in Oct. In contrast, expectations of both prices paid and prices received increase from Sep to Oct.

Table 11, US, FRB of Philadelphia Business Outlook Survey, Prices Paid and Prices Received, SA

	Increase	No Change	Decrease	Index
Current
Prices Paid
Oct	30.6	58.1	10.6	20.0
Sep	28.9	58.1	5.7	23.2
Aug	26.1	59.4	13.3	12.8
Jul	32.6	59.9	7.5	25.1
Jun	36.6	49.6	9.8	26.8
May	56.3	35.6	8.0	48.3
Prices Received
Oct	12.2	69.3	14.7	-2.5
Sep	17.5	61.6	16.7	0.9
Aug	10.1	69.9	19.1	-9.0
Jul	17.7	65.1	16.6	1.1
Jun	16.8	66.5	12.4	4.4
May	19.7	76.2	2.9	16.8
Six Months
Prices Paid
Oct	51.4	35.4	6.7	44.7
Sep	44.2	44.8	7.9	36.3
Aug	42.6	48.7	8.0	34.6
Jul	44.6	43.4	5.9	38.7
Jun	40.4	40.0	12.9	27.5
May	59.1	33.1	6.7	52.4
Prices Received
Oct	34.3	48.9	8.9	25.4
Sep	27.6	56.5	9.4	18.2
Aug	30.1	54.6	13.6	16.5
Jul	22.5	61.4	14.2	8.3
Jun	19.3	56.0	16.7	2.5
May	34.9	53.2	7.6	27.3

Source: http://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos1011.pdf

http://www.phil.frb.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdf

The producer price index of Germany rose 0.4 percent in Sep relative to Aug and 5.5 percent in the 12 months ending in Sep, as shown in Table 12. There has been significant deceleration in the monthly rates of increase after the drop in commodity prices in May. In Jan-Apr, the annual equivalent producer price inflation was 7.1 percent while in the quarter Jul-Sep the annual equivalent rate dropped to 4.9 percent. The producer price index fell 5.2 percent in the 12 months ending in Dec 2009 as a result of the fall of commodity prices originating in risk aversion after the panic of 2008.

Table 12, Germany, Producer Price Index ∆%

	12 Months ∆% NSA	Month ∆% Calendar and SA
Sep 2011	5.5	0.4
Aug	5.5	0.1
Jul	5.8	0.7
AE ∆% Jul-Sep		4.9
Jun	5.6	0.1
May	6.1	0.2
Apr	6.4	0.6
Mar	6.2	0.3
Feb	6.4	0.8
Jan	5.7	0.6
AE ∆% Jan-Apr		7.1
Dec 2010	5.3	0.8
Nov	4.4	0.4
Oct	4.3	0.4
Sep	3.9	0.5
Aug	3.2	0.1
Dec 2009	-5.2	0.2
Dec 2008	4.0	-0.2
Dec 2007	1.9	0.4
Dec 2006	4.2	0.2
Dec 2005	4.8	0.2
Dec 2004	2.9	0.2
Dec 2003	1.8	0.0

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

Chart 28 of the Federal Statistical Agency of Germany Statistiche Bundesamt Deutschland provides the producer price index of Germany from 2003 to 2011. Producer price inflation peaked in 2008 with the rise of commodity prices induced by the carry trade from zero interest rates to commodity futures. Prices then decline with the flight away from risk financial assets to government obligations after the financial panic in Sep 2008. With zero interest rates and no risk aversion, the carry trade pushed commodity future prices upwardly resulting in new rising trend of the producer price index.

Chart 28, Germany, Index of Producer Prices for Industrial Products, 2005=100

Source: Statistiche Bundesamt Deutschland

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

Chart 29 of the Federal Statistical Agency of Germany Statistiche Bundesamt Deutschland provides the unadjusted producer price index and trend. There is a clear upward trend of prices after the end of risk aversion with zero interest rates in 2009.

Chart 29, Germany, Producer Price Index, Non-adjusted Value and Trend, 2005=100

Source: Statistiche Bundesamt Deutschland

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/Prices/Content100/kpre550graf0.psml

Consumer price inflation has accelerated in the UK in 2011, as shown by Table 13. CPI inflation in Sep was 0.6 percent after 0.6 percent in Aug and the 12 months rate rose from 4.5 percent in Aug to 5.2 percent in Sep. The annual equivalent rate in Jan-Sep is 4.6 percent with annual equivalent rate in the quarter Jul-Sep of 4.9 percent. The 12 months rates rose from less than 4 percent in 2010 to 5.2 percent in Sep 2011.

Table 13, UK, Consumer Price Index, Month and 12 Months ∆%

	Month ∆%	12 Months ∆%
Sep 2011	0.6	5.2
Aug	0.6	4.5
Jul	0.0	4.4
AE ∆% Jul-Aug	4.9
Jun	-0.1	4.2
May	0.2	4.5
Apr	1.0	4.5
Mar	0.3	4.0
Feb	0.7	4.4
Jan	0.1	4.0
AE ∆% Jan-Sep	4.6
Dec 2010	1.0	3.7
Nov	0.4	3.3
Oct	0.3	3.2
Sep	0.0	3.1
Aug	0.5	3.1

Source:

http://www.ons.gov.uk/ons/dcp171778_238747.pdf

Table 14 provides the analysis of the monthly rate of inflation in Sep by the UK Office for National Statistics. The drivers of monthly inflation of 0.6 percent were clothing and footwear with contribution of 0.28 percentage points and housing and household services with contribution of 0.45 percentage points. Transport fell 2.1 percent in Sep with contribution of minus 0.35 percentage points.

Table 14, UK, Consumer Price Index Month ∆% and Percentage Point Contribution by Components

Sep 2011	Month ∆%	Percentage Point Contribution
CPI All Items	0.6
Food & Non-Alcoholic Beverages	0.2	0.02
Alcohol & Tobacco	0.8	0.03
Clothing & Footwear	4.4	0.28
Housing & Household Services	3.5	0.45
Furniture & Household Goods	1.2	0.07
Health	0.3	0.01
Transport	-2.1	-0.35
Communication	0.9	0.02
Recreation & Culture	0.1	0.01
Education	2.3	0.04
Restaurants & Hotels	0.4	0.05
Miscellaneous Goods & Services	0.0	0.00

Source: http://www.ons.gov.uk/ons/dcp171778_238747.pdf

Contributions of percentage points to the 12 months rate of consumer price inflation of 5.2 provided by the UK Office for National Statistics are in Table 15. Housing and household services rose 8.6 percent in 12 months, contributing 1.10 percentage points. Transport rose 8.9 percent in 12 months, contributing 1.41 percentage points. There is only negative change of 0.6 percent in recreation and culture but with negligible impact on the index. Tax increases in the effort of consolidation are frequently mentioned as contributing to inflation.

Table 15, UK, Consumer Price 12 Months ∆% and Percentage Point Contribution by Components

Sep 2011	12 Month ∆%	Percentage Point Contribution
CPI All Items	5.2
Food & Non-Alcoholic Beverages	6.4	0.71
Alcohol & Tobacco	10.0	0.42
Clothing & Footwear	2.1	0.17
Housing & Household Services	8.6	1.10
Furniture & Household Goods	5.3	0.34
Health	3.6	0.09
Transport	8.9	1.41
Communication	5.9	0.16
Recreation & Culture	-0.6	-0.09
Education	4.6	0.09
Restaurants & Hotels	4.7	0.57
Miscellaneous Goods & Services	2.4	0.23

Source:

http://www.ons.gov.uk/ons/dcp171778_238747.pdf

Inflation exceeded the target of 2 percent in three consecutive years from 2005 to 2007, as shown in Table 16. Inflation of 3.4 percent in 2008 and 3.4 percent in 2009 originated in the commodity shock caused by the carry trade from zero interest rates to positions in commodity futures. Slack in product and labor markets could not explain inflation in 2008 and 2009. The shock of risk aversion of the global recession caused unwinding of carry trades, resulting in decline of the rate of inflation to 1.7 percent in 2010. The economy is growing slowly as in other advanced economies with somewhat higher inflation.

Table 16, UK, Annual Average Consumer Price Index ∆%

	Annual Average ∆%
2010	1.7
2009	3.4
2008	3.8
2007	2.4
2006	2.5
2005	2.2
2004	1.3

Source: http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-223807

IV World Economic Slowdown. The JP Morgan Global Manufacturing & Services PMI^™ produced by JP Morgan and Markit in association with ISM and IFPSM finds that growth of the world economy accelerated toward the end of IIIQ2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8672). The JP Morgan all-industry, manufacturing and services, PMI seasonally adjusted diffusion index is closely associated with the seasonally-adjusted annual equivalent rate of global GDP. The JP Morgan global all-industry output index registered 52.0 in Sep, which is slightly higher than 51.4 in Aug that was the lowest in 25 months. The rate of growth in IIIQ2011 was the weakest since IIIQ2009, falling significantly lower than that in IQ2011, which was close to a five-year high. US growth of all-industry output was the driver of global acceleration with industry reaching a six-month high. Additional dynamism was contributed by China and the UK. While global new business showed an enhanced trend in Sep, the growth rate was lower than at the turn of the year. David Hensley, Director of Global Economics Coordination at JP Morgan finds that in Sep global output and new orders grew at relatively higher rates. The implicit growth rate is still quite weak with manufacturing slowing to standstill and services performing below expectations. The adverse impact of world growth slowdown on labor markets could restrict future growth. The JP Morgan Global Manufacturing PMI^™ fell from 50.2 in Aug to 49.9 in Sep for the first time below the contraction frontier of 50 since Jun 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8648). David Hensley, Director of Global Economics Coordination at JP Morgan finds stagnating PMI in the past few months with declining trend of new orders fed by falling flows of international trade. The information in the index suggests declining monthly world industrial production in future months. The table of world manufacturing purchasing managers’ indexes of Real Time Economics the Wall Street Journal (http://blogs.wsj.com/economics/2011/10/03/world-wide-factory-activity-by-country-18/tab/interactive/) shows indexes below 50 for the euro zone (France, Greece, Ireland, Italy, Spain), Netherlands, Australia, Brazil and Taiwan. Most other indexes are slightly above 50.

Short-term indicators of economies accounting for some three-quarters of world output are followed in this blog. The purchasing managers’ indexes are more current and integrated providing the best available world view. There are five conclusions based on the overall information.

1. Recession. The R (recession) word is similarly forbidden as the L (loss) word in positions in trading desks. There appears to be improvement in output data globally in Jul, Aug and Sep. There is growing consensus that the world economy may not fall in recession but with higher doubts on Europe that manages a sovereign risk crisis with tough political restrictions. Naturally, slower growth brings economies closer to contraction. Data for the US on industrial production confirm growth in Sep and the Business Outlook Index of the Federal Reserve Bank of Philadelphia registered positive change in the overall index and new orders for Oct

3. Labor Markets. Advanced economies continue to be plagued by fractured labor markets without improving perspectives

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

"The PMI registered 51.6 percent, an increase of 1 percentage point from August, indicating expansion in the manufacturing sector for the 26th consecutive month, at a slightly higher rate. The Production Index registered 51.2 percent, indicating a return to growth after contracting in August for the first time since May of 2009. The New Orders Index remained unchanged from August at 49.6 percent, indicating contraction for the third consecutive month. The Backlog of Orders Index decreased 4.5 percentage points to 41.5 percent, contracting for the fourth consecutive month and reaching its lowest level since April 2009, when it registered 40.5 percent. Comments from respondents generally reflect concern over the sluggish economy, political and policy uncertainty in Washington, and forecasts of ongoing high unemployment that will continue to put pressure on demand for manufactured products."

The Sep report shows that the manufacturing sector continues producing at 51.2, which is above the contraction frontier of 50. New orders deteriorated marginally with the Sep index at 49.6, which is slight below the contraction frontier of 50 and equal to the Aug index of also 49.6. The backlog of orders contracted 4.5 percentage points to 41.5 percent that indicates contraction and is the lowest number since 2009 when it registered 40.5 points. Important information in the report is the increase in the price segment from 55.6 in Aug to 56.0 in Sep. The export index rose from 50.5 in Aug to 53.5 in Sep. The overall Manufacturing ISM Report on Business^® rose by one percentage point, from 50.6 in Aug to 51.6 in Sep, indicating that manufacturing is growing at a higher rate in 26 months of expansion. Significant improvement for Oct in the Business Outlook Survey of the Federal Reserve Bank of Philadelphia may carry into the ISM manufacturing report to be released at the turn of the month. The index of industrial production of the Board of Governors of the Federal Reserve Bank finds growth of manufacturing of 0.4 percent in Sep and 3.9 percent in the 12 months ending in Sep. Manufacturing grew at the annual equivalent rate of 5.7 percent in the quarter from Jul to Sep 2011.

The Sep 2011 Non-manufacturing ISM Report on Business^® registered 53.0 in Sep, which was lower by 0.3 percentage points than 53.3 in Aug, which indicates growth at a slightly slower pace (http://www.ism.ws/ISMReport/NonMfgROB.cfm). This is by far compensated by the increase of 3.7 percentage points in the index of new orders from 52.8 in Aug to 56.5 in Sep. Employment was lower by 2.9 percentage points declining from 53.0 in Aug to 49.5, reversing direction to contraction. Another favorable aspect of the report is the decline in the price segment by 2.3 percentage points from 64.2 in Aug to 61.9, indicating increasing prices at slower pace.

Table USA provides the summary indicators of the US economy and where to locate them in the blog. Indicators released in the week of Sep 30 are discussed after Table USA.

Table USA, US Economic Indicators

Consumer Price Index	Sep 12 months NSA ∆%: 3.9; ex food and energy ∆%: 2.0 Sep month ∆%: 0.3; ex food and energy ∆%: 0.1 Blog 10/23/11
Producer Price Index	Jun 12 months NSA ∆%: 6.9; ex food and energy ∆% 2.5 Sep month SA ∆% 0.8; ex food and energy∆%: 0.2 Blog 10/23/11
PCE Inflation	Jul 12 months NSA ∆%: headline 2.8; ex food and energy ∆% 1.6 Blog 09/04/11
Employment Situation	Household Survey: Aug Unemployment Rate SA 9.1% Blog calculation People in Job Stress Aug: 29.9 million NSA Establishment Survey: Aug Nonfarm Jobs 0 (zero jobs created); Private +17,000 job created Jul 12 months Average Hourly Earnings Inflation Adjusted ∆%: minus 1.3% Blog 09/04/11
Nonfarm Hiring	Nonfarm Hiring fell from 64.9 million in 2006 to 47.2 million in 2010 or by 17.7 million Private-Sector Hiring Jul 2011 3.985 million lower by 1.393 million than 5.378 million during contraction in Jul 2001 Blog 09/11/11
GDP Growth	BEA Revised National Income Accounts back to 2003 IQ2011 SAAR ∆%: 0.4 IIQ2011 SAAR ∆%: 1.3 First semester 2011 AE ∆% 0.8 Blog 09/02/11
Personal Income and Consumption	Jul month ∆% SA Real Disposable Personal Income (RDPI) -0.1 Jul month SA ∆% Real Personal Consumption Expenditures (RPCE): 0.5 12 months NSA ∆%: RDPI: 1.2; RPCE ∆%: 1.6 Blog 09/04/11
Quarterly Services Report	IIQ11/IQII SA ∆%: Information 2.0 Professional 1.6 Administrative 2.1 Hospitals 1.8 Blog 09/11/11
Employment Cost Index	IIQ2011 SA ∆%: 0.7 Jun 12 months ∆%: 3.4 Blog 08/07/11
Industrial Production	Sep month SA ∆%: 0.2 Sep 12 months NSA ∆%: 3.2 Capacity Utilization: 77.4 Blog 10/23/11
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 From -8.82 Sep to Oct –8.48 New Orders: From -8.0 Sep to 0.16 Oct Blog 10/23/11
Philadelphia Fed Business Outlook Index	General Index from -17.5 Sep to 9.7 Oct New Orders from Sep -11.3 to 7.9 Oct Blog 10/23/11
Manufacturing Shipments and Orders	Jul/Aug New Orders SA ∆%: minus 0.2; ex transport ∆%: minus 0.2 12 months Jan-Aug NSA ∆%: 13.0; ex transport ∆% 13.0 Blog 10/09/11
Durable Goods	Aug New Orders SA ∆%: -0.1; ex transport ∆%: -0.1 Aug 12 months NSA New Orders ∆%: 10.1; ex transport ∆% : 9.3 Blog 10/02/11
Sales of Merchant Wholesalers	Jan-Aug 2011/2010 ∆%: Total 15.1; Durable Goods: 12.3; Nondurable Goods 17.4 Blog 10/09/11
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	Aug 11/Aug 10 NSA ∆%: Total Business 13.7; Manufacturers 13.4 Retailers 9.3; Merchant Wholesalers 18.2 Blog 10/16/11
Sales for Retail and Food Services	Sep 12 months ∆%: Retail and Food Services: 8.1; Retail ∆% 7.6 Blog 10/16/11
Value of Construction Put in Place	Aug SAAR month SA ∆%: 1.4 Aug 12 months NSA: 1.4 Blog 10/09/11
Case-Shiller Home Prices	Jul 2011/Jun 2010 ∆% NSA: 10 Cities –3.7; 20 Cities: –4.1 ∆% Jul SA: 10 Cities -0.1 ; 20 Cities: 0.1 Blog 10/02/11
FHFA House Price Index Purchases Only	Jul SA ∆% 0.8; 12 month ∆%: minus 3.2 Blog 09/25/11
New House Sales	Aug month SAAR ∆%: -2.3 Jan/Aug 2011/2010 NSA ∆%: minus 8.3 Blog 10/02/11
Housing Starts and Permits	Sep Starts month SA ∆%: 15.0; Permits ∆%: -5.0 Jan/Sep 2011/2010 NSA ∆% Starts -1.5; Permits ∆% –1.5 Blog 10/23/11
Trade Balance	Balance Aug SA -$45,608 million versus Jul -$45,625 million Exports Aug SA ∆%: -0.1 Imports Aug SA ∆%: -0.1 Exports Jan-Aug 2011/2010 NSA ∆%: 18.0 Imports Jan-Aug 2011/2010 NSA ∆%: 17.0 Blog 10/16/11
Export and Import Prices	Sep 12 months NSA ∆%: Imports 13.4; Exports 9.5 Blog 10/16/11
Consumer Credit	Aug ∆% annual rate: 5 minus 4.6% Blog 10/09/11
Net Foreign Purchases of Long-term Treasury Securities	Aug Net Foreign Purchases of Long-term Treasury Securities: $57.9 billion Aug versus Jul $9.1 billion Major Holders of Treasury Securities: China $1137 billion; Japan $936.6 billion Blog 10/23/11
Treasury Budget	Fiscal Year 2011/2010 ∆%: Receipts 6.5; Outlays 4.2; Individual Income Taxes 21.5 Deficit Fiscal Year 2011 $1,298,614 million Blog 10/16/11
Flow of Funds	IIQ2011 ∆ since 2007 Assets -$6311B Real estate -$5111B Financial -$1490 Net Worth -$5802 Blog 09/18/11
Current Account Balance of Payments	IIQ2011 -121B %GDP 3.2 Blog 09/18/11

Links to blog comments in Table USA:

10/16/11 http://cmpassocregulationblog.blogspot.com/2011/10/odds-of-slowdown-or-recession-united.html

10/09/11 http://cmpassocregulationblog.blogspot.com/2011/10/twenty-nine-million-unemployedunderempl.html

10/02/11 http://cmpassocregulationblog.blogspot.com/2011/10/us-growth-standstill-at-08-percent.html

09/25/11 http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html

09/18/11 http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html

09/11/11 http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html

09/05/11 http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html

Industrial production rose 0.2 percent in Sep and 3.2 percent in the 12 months ending in Sep, as shown in Table 17. In the four months ending in Sep, industrial production grew at the annual equivalent rate of 3.9 percent, virtually 4.0 percent. Business equipment increased 1.0 percent in Sep, 10.3 percent in the 12 months ending in Sep and at the annual equivalent rate of 11.7 percent in the four months Jun-Sep. Capacity utilization of total industry stood has increased as analyzed by the Fed in its report (http://www.federalreserve.gov/releases/g17/current/): “capacity utilization for total industry edged up to 77.4 percent, a rate 1.7 percentage points above its level from a year earlier but 3.0 percentage points below its long-run (1972--2010) average.”

Table 17, US, Industrial Production and Capacity Utilization, SA %

	Sep	Aug	Jul	Jun	Sep 2011/ Sep 2010
Total	0.2	0.0	1.1	0.0	3.2
Market Groups
Final Products	0.4	0.4	1.0	-0.2	3.8
Consumer Goods	0.1	-0.1	1.0	-0.2	1.6
Business Equipment	1.0	1.4	1.2	0.1	10.3
Non Industry Supplies	-0.1	-0.3	1.0	-0.2	2.1
Cons- truction	0.2	0.1	0.9	0.1	4.3
Materials	0.1	-0.2	1.1	0.3	3.0
Industry Groups
Manu- facturing	0.4	0.3	0.7	-0.1	3.9
Mining	0.8	0.8	1.5	0.3	5.2
Utilities	-1.8	-2.9	2.8	0.4	-3.6
Capacity	77.4	77.3	77.4	76.7	1.0

Sources: http://www.federalreserve.gov/releases/g17/current/

A longer perspective of manufacturing in the US is provided by Table 18. There has been evident deceleration of manufacturing growth in the US from 2010 and the first three months of 2011 as shown by 12 months rates of growth. The rates of decline of manufacturing in 2009 are quite high with a drop of 18.1 percent in the 12 months ending in Apr 2009. Manufacturing recovered from this decline and led the recovery from the recession. Rates of growth appear to be returning to the levels around 3 percent in the annual rates before the recession.

Table 18, US, Monthly and 12 Months Rates of Growth of Manufacturing ∆%

	Month SA ∆%	12 Months NSA ∆%
Sep 2011	0.4	3.9
Aug	0.3	3.5
Jul	0.7	3.6
Jun	0.0	3.5
May	-0.1	3.5
Apr	-0.6	4.5
Mar	0.7	5.9
Feb	0.1	6.2
Jan	0.7	6.1
Dec 2010	1.0	6.4
Nov	0.2	5.5
Oct	0.2	6.2
Sep	0.2	5.9
Aug	0.1	6.6
Jul	0.8	7.6
Jun	-0.1	8.1
May	1.1	7.8
Apr	0.7	6.1
Mar	0.9	5.9
Feb	0.1	0.6
Jan	1.0	6.2
Dec 2009	0.2	-3.2
Nov	0.8	-5.9
Oct	-0.04	-8.9
Sep	0.8	-10.3
Aug	1.0	-13.3
Jul	1.3	-14.9
Jun	-0.3	-17.4
May	-1.2	-17.4
Apr	-0.8	-18.1
Mar	-2.0	-17.1
Feb	0.1	-16.0
Jan	-2.7	-16.5
Dec 2008	-3.1	-14.1
Nov	-2.4	-11.5
Oct	-0.6	-9.2
Sep	-3.4	-9.0
Aug	-1.4	-5.5
Jul	-1.1	-4.1
Jun	-0.6	-3.5
May	-0.6	-2.8
Apr	-1.2	-1.5
Mar	-0.4	-0.9
Feb	-0.5	0.6
Jan	-0.3	1.9
Dec 2007	0.3	1.8
Nov	0.3	3.2
Oct	-0.5	2.8
Sep	0.5	3.2
Aug	-0.5	2.9
Jul	0.3	3.8
Jun	0.3	3.3
May	-0.2	3.5
Apr	0.7	4.0
Mar	0.7	2.8
Feb	0.5	2.0
Jan	-0.3	1.8
Dec 2006		3.2
Dec 2005		1.4
Dec 2004		2.8
Dec 2003		1.7

Source: http://www.federalreserve.gov/releases/g17/table1_2.htm

Chart 30 of the Board of Governors of the Federal Reserve System provides industrial production, manufacturing and capacity since the 1970s. There was acceleration of growth of industrial production, manufacturing and capacity in the 1990s because of rapid growth of productivity in the US (see Pelaez and Pelaez, The Global Recession Risk (2007), 135-44). The slopes of the curves flatten in the 2000s. Production and capacity have not recovered to the levels before the global recession.

Chart 30, US, Industrial Production, Capacity and Utilization

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/current/ipg1.gif

The modern industrial revolution of Jensen (1993) is captured in Chart 31 of the Board of Governors of the Federal Reserve System (for the literature on M&A and corporate control see Pelaez and Pelaez, Regulation of Banks and Finance (2009a), 143-56, Globalization and the State, Vol. I (2008a), 49-59, Government Intervention in Globalization (2008c), 46-49). The slope of the curve of total industrial production accelerates in the 1990s to a much higher rate of growth than the curve excluding high-technology industries. Growth rates decelerate into the 2000s and output and capacity utilization have not recovered fully from the strong impact of the global recession. Growth in the current cyclical expansion has been more subdued than in the prior comparably deep contractions in the 1970s and 1980s. Chart 31 shows that the past recessions after World War II are the relevant ones for comparison with the recession after 2007 instead of common comparisons with the Great Depression. The bottom left-hand part of Chart 31 shows the strong growth of output of communication equipment, computers and semiconductor that continued from the 1990s into the 2000s. Output of computers and semiconductors has already surpassed the level before the global recession.

Chart 31, US, Industrial Production, Capacity and Utilization of High Technology Industries

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/current/ipg3.gif

Additional detail on industrial production and capacity utilization is provided in Chart 32 of the Board of Governors of the Federal Reserve System. Production of consumer durable goods fell sharply during the global recession by more than 30 percent and is still around 10 percent below the level before the contraction. Output of nondurable consumer goods fell around 10 percent and is some 5 percent below the level before the contraction. Output of business equipment fell sharply during the contraction of 2001 but began rapid growth again after 2004. An important characteristic is rapid growth of output of business equipment in the cyclical expansion after sharp contraction in the global recession. Output of defense and space only suffered reduction in the rate of growth during the global recession and surged ahead of the level before the contraction. Output of construction supplies collapsed during the global recession and is well below the level before the contraction. Output of energy materials was stagnant before the contraction but has recovered sharply above the level before the contraction.

Chart 32, US, Industrial Production and Capacity Utilization

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/current/ipg2.gif

The general business conditions index of the Federal Reserve Bank of New York Empire State Manufacturing Survey shows mild improvement from minus 8.82 in Sep to minus 8.48 in Oct, as shown in Table 19. The index has been registering negative changes in the five months from Jun to Oct. A favorable development is the increase of the segment of new orders from minus 8.0 in Sep to positive 0.16 in Oct, now above the contraction zone of zero. There are other changes to positive readings in shipments from minus 12.88 in Sep to positive 5.33 in Oct and number of employees from minus 5.43 in Sep to 3.37 in Oct. Expectations for the next six months of the general business conditions index fell from 13.04 in Sep to 6.74 in Oct at levels well below the higher expectations of 22.45 in Jun of 22.45 and 32.22 in Jul. Expectations of new orders fell from 13.04 in Sep to 12.35 in Oct and are well below 22.56 in Jul. Expectations of new employees surged from 0.00 in Sep to 6.74 in Oct but are well below 17.78 in Jul.

Table 19, US, New York Federal Reserve Bank Empire State Manufacturing Survey Index

	Jun	Jul	Aug	Sep	Oct
Current Conditions
General Business Conditions	-7.79	-3.76	-7.72	-8.82	-8.48
New Orders	-3.61	-5.45	-7.82	-8.0	0.16
Shipments	-8.02	2.22	3.01	-12.88	5.33
Unfilled Orders	0.00	-12.22	-15.22	-7.61	-4.49
Inventories	1.02	-5.56	-7.61	-11.96	-8.99
# Employees	10.20	1.11	3.26	-5.43	3.37
Average Employee Workweek	-2.04	-15.56	-2.17	-2.17	-4.49
Expectations Six Months
General Business Conditions	22.45	32.22	8.70	13.04	6.74
New Orders	15.31	25.56	6.52	13.04	12.36
Shipments	17.35	30.00	7.61	13.04	17.98
Unfilled Orders	-9.18	5.56	-6.52	-6.52	1.12
Inventories	-9.18	1.1	7.61	-2.17	-15.73
# Employees	6.12	17.78	6.52	0.00	6.74
Average Employee Workweek	-2.04	2.22	-4.35	-6.52	-2.25

Source: http://www.newyorkfed.org/survey/empire/oct2011.pdf

The Philadelphia Business Outlook Survey in Table 20 provides an optimistic reading that could be confirmed by the purchasing managers’ index for Oct to be released at the turn of the month. The general index rose from minus 17.5 in Sep to 7.8 in Oct, reversing significant weakness since Jun. New orders point to increasing future activity, rising from minus 11.3 in Sep to 7.8 in Oct. Employment is mixed with number of employees declining from 5.8 in Sep to 1.4 in Oct but average employee workweek rising from minus 13.7 in Sep to 3.1 in Oct. All the indexes of expectations for the next six months are showing increases. The general index rose from 21.4 in Sep to 27.2 in Oct and new orders rose from 21.6 in Sep to 26.7 in Oct.

Table 20, FRB of Philadelphia Business Outlook Survey Diffusion Index SA

	Jun	Jul	Aug	Sep	Oct
Current Conditions
General Index	-7.7	3.2	-30.7	-17.5	8.7
New Orders	-7.6	0.1	-26.8	-11.3	7.8
Shipments	4.0	4.3	-13.9	-22.8	13.6
Unfilled Orders	-16.3	-16.3	-20.9	-10.4	3.4
Number Employees	4.1	8.9	-5.2	5.8	1.4
Average Employee Workweek	1.9	-5.4	-14.4	-13.7	3.1
Expectation Six Months
General Index	2.5	23.7	1.4	21.4	27.2
New Orders	7.9	27.8	16.3	21.6	26.7
Shipments	6.6	23.0	12.6	25.2	27.1
Unfilled Orders	-9.6	2.9	-3.5	4.7	7.7
Number Employees	5.5	10.1	7.8	11.2	14.5
Average Employee Workweek	-1.6	4.1	-5.3	7.4	9.7

Sources: http://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos1011.pdf

http://www.phil.frb.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdf

http://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0711.pdf

http://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0611.pdf

Chart 33 of the Federal Reserve Bank of Philadelphia is very useful, providing current and future general activity indexes from Jan 1995 to Oct 2011. The shaded area are the recession cycle dates of the National Bureau of Economic Research (NBER) (http://www.nber.org/cycles.html). The Philadelphia Fed index dropped during the initial period of recession and then led the recovery, as industry overall. There was a second decline of the index into 2011 and what hopefully could be renewed strength.

Chart 33, Federal Reserve Bank of Philadelphia Business Outlook Survey, Current and Future Activity Indexes

Source: Federal Reserve Bank of Philadelphia

http://www.philadelphiafed.org/index.cfm

Seasonally-adjusted annual rates (SAAR) of housing starts and permits are shown in Table 21. There was optimism with the release of the increase in housing starts by 15 percent in Sep relative to Aug. Housing permits, indicating future activity, fell 5.0 percent. Monthly rates in starts and permits fluctuate significantly on a monthly basis as shown in Table 21.

Table 21, US, Housing Starts and Permits SSAR Month ∆%

	Housing Starts SAAR	Month ∆%	Housing Permits SAAR	Month ∆%
Sep 2011	658	15.0	594	-5.0
Aug	572	-7.0	625	4.0
Jul	615	0.0	601	-2.6
Jun	615	11.2	617	1.3
May	553	0.7	609	8.2
Apr	549	-7.4	563	-1.9
Mar	593	14.5	574	7.5
Feb	518	-18.6	534	-6.0
Jan	636	20.9	568	-9.8
Dec 2010	526	-4.5	630	-9.8
Nov	551	2.3	564	1.6
Oct	539	-9.7	555	-1.2
Sep	597	-1.5	562	-2.3

SAAR: Seasonally Adjusted Annual Rate

Source: US Bureau of the Census

http://www.census.gov/const/newresconst.pdf

Cumulative housing starts and permits from Jan to Sep not-seasonally adjusted are provided in Table 22. Housing starts fell 1.5 percent in the cumulative of Jan-Sep 2011 relative to the same period in 2010 and in the same period new permits also fell 1.5 percent. Construction of new houses in the US remains at very depressed levels. Housing starts fell 68.1 percent in Jan-Sep 2011 relative to Jan-Sep 2006 and fell 71.1 percent relative to Jan-Sep 2005. Housing permits fell 68.9 percent from Jan-Sep 2006 to Jan-Sep 2011 and fell 72.4 percent from Jan-Sep 2005.

Table 22, US, Housing Starts and New Permits, Thousands of Units, NSA, and %

	Housing Starts	New Permits
Jan-Sep 2011	459.9	459.8
Jan-Sep 2010	467.1	466.9
∆% Jan-Sep 2011/Jan-Sep 2010	-1.5	-1.5
Jan-Sep 2006	1442.6	1482.9
∆%/Jan-Sep 2011	-68.1	-68.9
Jan-Sep 2005	1591.1	1665.8
∆%/ Jan-Sep 2011	-71.1	-72.4

Source: http://www.census.gov/const/newresconst.pdf

http://www.census.gov/const/newresconst_200709.pdf

http://www.census.gov/const/newresconst_200609.pdf

Chart 34 of the US Bureau of the Census shows the sharp increase in construction of new houses from 2000 to 2006. Housing construction fell sharply through the recession, recovering from the trough around IIQ2009. The right-hand side of Chart 34 shows a mild downward trend from mid 2010 to the present.

Chart 34, US, New Housing Units Started in the US, SSAR (Seasonally Adjusted Annual Rate)

Source: US Bureau of the Census

http://www.census.gov/briefrm/esbr/www/esbr020.html

A longer perspective on residential construction in the US is provided by Table 23 with annual data from 1960 to 2010. Housing starts fell 71.6 percent from 2005 to 2010, 62.6 percent from 2000 to 2010 and 53.1 percent relative to 1960. Housing permits fell 71.9 percent from 2005 to 2010, 62.0 percent from 2000 to 2010 and 39.4 percent from 1960 to 2010. Housing starts rose 31.8 from 2000 to 2005 while housing permits grew 35.4 percent. From 1990 to 2000 housing starts increased 31.5 percent while permits increased 43.3 percent.

Table 23, US, Annual New Privately Owned Housing Units Authorized by Building Permits in Permit-Issuing Places and New Privately Owned Housing Units Started, Thousands

	Starts	Permits
2010	586.9	604.6
∆% 2010/2005	-71.6	-71.9
∆% 2010/2000	-62.6	-62.0
∆% 2010/1960	-53.1	-39.4
2009	554,0	583.0
2008	905.5	905.4
2007	1,355,0	1,398.4
2006	1,800.9	1,838.9
2005	2,068.3	2,155.3
∆% 2005/2000	31.8	35.4
2004	1,955.8	2,070.1
2003	1,847.7	1,889,2
2002	1,704.9	1,747.2
2001	1,602.7	1,1637.7
2000	1,568.7	1,592.3
∆% 2000/1990	31.5	43.3
1990	1,192,7	1,110.8
1980	1,292.7	1,190.6
1970	1,433.6	1,351.5
1960	1,252.2	997.6

Source: http://www.census.gov/const/www/newresconstindex.html

Risk aversion channeled funds toward US long-term and short-term securities as shown in Table 24. Net foreign purchases of US long-term securities (row C in Table 24) in Aug were a high for a month in 2011 of $57.9 billion, incomparably larger than $9.1 billion in Jul and $4.1 billion in May. Foreign (residents) purchases less sales of US long-term securities (row A in Table 24) in Aug were $66 billion, much higher than $24.1 billion in Jul and minus $10.9 billion in Jun. Net US (residents) purchases of long-term foreign securities (row B in Table 24) in Aug were minus $8.1 billion. In Aug,

D = A + B = $66.0 billion - $8.1 billion = $57.9 billion

The significant change in Table 24 in Aug is in A1 private purchases by residents overseas of US long-term securities of $74.7 billion of which A11 Treasury securities $69.7 billion and A12 $9.8 billion agency securities. The sovereign risk crisis in Europe diverted foreign private investment away from risk toward the safe haven of US Treasury securities. Row D shows an increase in purchases of short-term dollar denominated obligations. Foreign private holdings of US Treasury bills increased $11.2 billion (row D11) and foreign official holdings increased $16.9 billion. Risk aversion of principal losses in foreign securities dominated decisions to accept zero interest rates in Treasury securities with no perception of principal losses. In the case of long-term securities, investors preferred to sacrifice inflation and possible duration risk to avoid principal losses.

Table 24, Net Cross-Borders Flows of US Long-Term Securities, Billion Dollars, NSA

	Jun 2011	Jul 2011	Aug 2011
A Foreign Purchases less Sales of US LT Securities	-10.9	24.1	66.0
A1 Private	-22.5	9.8	74.7
A11 Treasury	-17.4	1.7	69.7
A12 Agency	2.1	6.9	9.8
A13 Corporate Bonds	-10.1	1.6	1.7
A14 Equities	2.9	-0.4	-6.6
A2 Official	11.5	14.2	-8.7
A21 Treasury	13.8	13.9	-9.6
A22 Agency	-2.4	1.3	-1.0
A23 Corporate Bonds	-0.7	-0.4	2.0
A24 Equities	0.8	-0.6	0.0
B Net US Purchases of LT Foreign Securities	15.1	-15.0	-8.1
B1 Foreign Bonds	13.4	0.6	-4.9
B2 Foreign Equities	1.7	-15.6	-3.2
C Net Foreign Purchases of US LT Securities	4.1	9.1	57.9
D Increase in Foreign Holdings of Dollar Denominated Short-term	-10.2	-35.2	23.6
D1 US Treasury Bills	-10.4	-32.1	28.1
D11 Private	5.1	-16.6	11.2
D12 Official	-15.5	-15.4	16.9
D2 Other	0.2	-3.2	-4.5

C = A + B;

A = A1 + A2

A1 = A11 + A12 + A13 + A14

A2 = A21 + A22 + A23 + A24

B = B1 + B2

D = D1 + D2

D1 = D11 + D12

Sources: http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticpress.aspx#1

Table 25 provides major foreign holders of US Treasury securities. China is the largest holder with $1137.0 billion in Aug 2011, slightly lower than $1160.1 billion in Dec 2010. Japan increased its holdings from $882.3 billion in Dec 2010 to $936.6 billion in Aug. The United Kingdom continued to increase its holding at $397.2 billion in Aug relative to $270.4 billion in Dec. Caribbean banking centers increased their holdings by $32.5 billion from Jul to Aug likely in dedicated wealth-management funds. There was an increase in holdings of Switzerland by $39.1 billion from Jul to Aug also likely in dedicated wealth-management funds.

Table 25, US, Major Foreign Holders of Treasury Securities $ Billions at End of Period

	Aug 2011	Jul 2011	Dec 2010
China	1137.0	1173.5	1160.1
Japan	936.6	914.8	882.3
United Kingdom	397.2	353.4	270.4
Oil Exporters	236.3	234.4	211.9
Brazil	210.0	210.0	186.1
Caribbean Banking Centers	161.2	128.7	168.4
Taiwan	150.3	154.3	155.1
Hong Kong	118.4	111.9	134.2
Switzerland	147.5	108.4	106.8
Hong Kong	107.9	111,9	134.2
Russia	97.1	100.7	151.0

Source:

http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/index.aspx

http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

IVB Japan. The strong yen and weak world economic growth are beginning to affect manufacturing in Japan. The Markit/JMMA Purchasing Managers’ Index^™ for Sep, released on Sep 30, registered a decline from 51.9 in Aug to 49.3 in Sep, which indicates that the manufacturing sector deteriorates but only marginally (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8595). The marginal contraction interrupts V-shaped recovery from the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. For the first time in four months, incoming new business contracted. Weaker demand from China partially explains the fall in demand for new export orders. The survey finds sharp increases in input prices for raw materials and fuels but falling prices for manufacturers’ finished goods. Composite data in the Markit Japan Services PMI^™ shows falling output in the private sector of the Japanese economy in Sep for a seventh consecutive month. Confidence in the service sector fell to the lowest in five months. Companies were forced to reduce their sales prices because of intensive competition. The composite index remained below 50 for the seventh consecutive month, indicating strong reduction in activity of the private sector. Alex Hamilton, economist at Markit, finds that the combination of falling manufacturing production for the first time in five months together with contraction of services indicates contraction of the private sector of the Japanese economy. The all industry activity index of Japan, which approximates GDP, fell 0.5 percent in Aug and was flat in the 12 months ending in Aug.

Table JPY provides the country data table for Japan followed with indicators released in the week of Oct 14.

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	Sep ∆% -0.2 12 months ∆% 2.5 Blog 10/16/11
Consumer Price Index	Jul SA ∆% 0.0 Jul 12 months NSA ∆% 0.2 Blog 08/28/11
Real GDP Growth	IIQ2011 ∆%: –0.5 on IQ2011; ∆% from quarter a year earlier: –1.1% Blog 09/11/11
Employment Report	Aug Unemployed 2.76 million Change in unemployed since last year: minus 450 thousand Unemployment rate: 4.4% Blog 10/02/11
All Industry Index	Aug month SA ∆% -0.5 12 months NSA ∆% 0.0 Blog 10/23/11
Industrial Production	Aug SA month ∆%: 0.8 12 months NSA ∆% 0.6 Blog 10/02/11
Machine Orders	Total Aug ∆% 6.5 Private Aug ∆%: -3.6 Aug ∆% Excluding Volatile Orders -3.6 Blog 10/16/2011
Tertiary Index	Aug month SA ∆% -0.2 Aug 12 months NSA ∆% 0.2 Blog 10/16/2011
Wholesale and Retail Sales	Aug 12 months: Total ∆%: 3.3 Wholesale ∆%: 5.6 Retail ∆%: -2.6 Blog 10/02/11
Family Income and Expenditure Survey	Aug 12 months ∆% total nominal consumption minus 3.9, real minus 4.1 Blog 10/02/11
Trade Balance	Exports Aug 12 months ∆%: 2.8 Imports Aug 12 months ∆% 19.2 Blog 09/25/11

Links to blog comments in Table JPY: 10/16/11 http://cmpassocregulationblog.blogspot.com/2011/10/odds-of-slowdown-or-recession-united.html

10/09/11 http://cmpassocregulationblog.blogspot.com/2011/10/twenty-nine-million-unemployedunderempl.html

10/02/11 http://cmpassocregulationblog.blogspot.com/2011/10/us-growth-standstill-at-08-percent.html

09/25/11 http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html

09/25/11 http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html

09/11/11 http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html

09/04/11 http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html

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

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

The indices of all industry activity of Japan, which is an approximation of GDP or economic activity, fell to levels close to the worst point of the recession, showing the brutal impact of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Table 26 with the latest revisions shows the quarterly index which permits comparison with the movement of real GDP. The first row provides weights of the various components of the index: AG (agriculture), CON (construction), IND (industrial production), TERT (services), IND (industrial production) and GOVT (government). GDP fell 0.5 percent in the second quarter. Another important fact is the decline of GDP in IVQ2010 by 0.6 percent. All components of the indices of all industry activity fell with the exception of government and services. Japan had already experienced a very weak quarter when it was unexpectedly hit on Mar 11 by the Great East Earthquake and Tsunami of Mar 11, 2011. The worst impact of the natural disaster was on construction with drop of 7.2 percent in IIQ2011 relative to IQ2011. Industrial production fell 4.0 percent from IQ2011 into IIQ2011. Many accounts had already been closed when the earthquake occurred, but there is visible decline of the indices of all industry by 1.9 percent in IQ2011 caused by decline of industrial production by 2.0 percent and services by 1.4 percent.

Table 26, Japan, Indices of All Industry Activity Percentage Change from Prior Quarter SA ∆%

	CON	IND	TERT	GOVT	ALL IND	REAL GDP
Weight %	5.7	18.3	63.2	11.4	100.0
2011
IIQ	-7.2	-4.0	0.0	0.7	-0.4	-0.5
IQ	2.7	-2.0	-1.4	0.2	-1.9	0.9
2010
IV Q	-1.8	-0.1	0.3	-0.3	-0.2	-0.6
III Q	1.9	-1.0	0.6	0.0	0.7	1.0
IIQ	-0.9	0.7	0.4	-0.2	0.8	-0.1
IQ	0.7	7.4	0.7	-0.4	1.3	2.3

AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity

Source:

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201108j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201106j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201107j.pdf

There are more details in Table 27. The all industry activity index fell 0.5 percent in Aug relative to Jul with decline of the tertiary or services sector by 0.2 percent offsetting the gain in industry of 0.6 percent and of construction by 2.5 percent. Jul was saved by industrial production that grew 0.4 percent after growing 3.8 percent in Jun, 6.2 percent in May and 1.6 percent in Apr, following a brutal collapse of 15.5 percent in Mar. All other components of the indices of all industry activity fell in Jul. The highest risk to Japan is if weakening world growth would affect Japanese exports.

Table 27, Japan, Indices of All Industry Activity Percentage Change from Prior Month SA ∆%

	CON	IND	TERT	GOVT	ALL IND
Aug 2011	2.5	0.6	-0.2	0.2	-0.5
Jul	0.8	0.4	-0.3	-0.6	0.4
Jun	-0.3	3.8	1.9	0.3	2.2
May	3.7	6.2	0.9	1.0	2.0
Apr	-5.7	1.6	2.7	-0.1	1.7
Mar	-8.6	-15.5	-5.9	-0.1	-6.4
Feb	6.3	1.8	0.8	0.2	0.9
Jan	2.3	0.0	-0.1	0.0	-0.5
Dec 2010	-0.5	2.4	-0.2	0.3	0.1
Nov	-1.4	1.6	0.6	-0.4	0.3
Oct	0.1	-1.4	0.2	-0.1	0.0
Sep	-1.9	-0.8	-0.4	-0.1	-0.4
Aug	1.6	-0.1	0.1	0.1	-0.5
Jul	0.8	0.3	0.7	0.1	1.1
Jun	-2.1	-1.5	0.1	-0.1	0.2
May	6.3	-0.1	-0.3	0.0	0.0
Apr	-3.1	0.6	1.6	-0.2	0.9

Source:

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201108j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201106j.pdf

Rates of change from a year earlier in calendar years and relative to the same quarter a year earlier are provided in Table 28. The first row shows that services contribute 63.2 percent of the total index and industry contributes 18.3 percent for joint contribution of 81.5 percent. The fall of industrial production in 2009 was by a catastrophic 21.9 percent. Japan emerged from the crisis with industrial growth of 16.4 percent in 2010. Quarterly data show that industry is the most dynamic sector of the Japanese economy.

Table 28, Japan, Indices of All Industry Activity Percentage Change from Earlier Calendar Year and Same Quarter Year Earlier NSA ∆%

	CON	IND	TERT	GOVT	ALL IND	REAL GDP
Weight %	5.7	18.3	63.2	11.4	100.0
Calendar Year
2010	-7.0	16.4	1.3	-0.7	3.1	4.0
2009	-5.6	-21.9	-5.2	0.1	-7.7	-6.3
2008	-7.6	-3.4	-1.0	-1.4	-1.9	-1.2
2011
IIQ	-4.8	-6.8	-0.5	0.5	-1.7	-1.1
IQ	1.6	-2.5	-0.1	-0.4	-0.5	-1.0
2010
IV Q	-0.6	5.9	1.6	-0.8	2.1	2.2
III Q	-3.2	14.0	1.8	-0.6	3.2	5.0
IIQ	-11.3	21.3	1.4	-0.7	3.5	3.1
IQ	-12.4	28.0	0.8	-0.5	3.9	5.6

Source:

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201108j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201106j.pdf

Rates of change of a month relative to the same month a year earlier for the indices of all industry activity of Japan are shown in Table 29. The all industry activity index was flat in Aug even with an increase in industry of 0.4 percent and of the tertiary index of 0.2 percent. Jul shows weakness in all private-sector components relative to a year earlier. The economy does not appear to have recovered to the level of activity before the Great East Earthquake/tsunami.

Table 29, Japan, Indices of All Industry Activity Percentage Change from Same Month Year Earlier NSA ∆%

	CON	IND	TERT	GOVT	ALL IND
Aug 2011	-3.5	0.4	0.2	-0.1	0.0
Jul	-4.5	-3.0	-0.2	1.2	-0.8
Jun	-4.4	-1.7	0.9	1.1	0.2
May	-6.0	-5.5	-0.2	0.1	-1.3
Apr	-3.8	-13.6	-2.3	0.4	-4.0
Mar	-1.1	-13.1	-3.1	-0.3	-4.5
Feb	4.4	2.9	2.0	-0.3	2.0
Jan	1.3	4.6	1.1	-0.5	1.4
Dec 2010	-0.5	5.9	1.8	-0.7	2.1
Nov	-0.5	7.0	2.5	-1.9	2.7
Oct	-1.1	5.0	0.5	0.3	1.3
Sep	-2.8	12.1	1.3	-0.6	2.7
Aug	-1.7	15.5	2.3	-1.1	3.8
Jul	-5.3	14.6	1.6	-0.1	3.3
Jun	-8.3	16.6	1.0	-0.7	3.0
May	-8.1	20.7	1.2	-0.9	3.4
Apr	-17.0	27.0	1.9	-0.4	-

Source:

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201108j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201106j.pdf

IVC China. The seasonally-adjusted HSBC Purchasing Managers’ Index^™ compiled by Markit was unchanged at 49.9 in Sep, indicating marginal deterioration of overall manufacturing in China (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8596). The quarterly average of the index is the lowest since IQ2009. Hongbin Qu, Chief Economist, China & Co-head of Asian Economic Research at HSBC does not find that the data suggest sharp slowing of manufacturing and that the results of the survey indicate continuing economic growth at 8.5 percent to 9 percent in future years. The composite output index of manufacturing and services of the HSBC China Services PMI^™ compiled by Markit rose to 51.5 in Sep, moving away from near stagnation in Aug (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8635). The index is below the long-run average of the series of 54.6 and its level is the lowest since IQ2009. The improvement was caused by an increase in the activity of the services sector with the index climbing to 53.0 in Sep from 50.6 in Aug. Performance is still substandard relative to historical data. Inflation of input prices registered the highest in four months. Table CNY provides the country data table for China.

Table CNY, China, Economic Indicators

Price Indexes for Industry	Sep 12 months ∆%: 6.5 Jan-Sep ∆%: 7.0 Sep month ∆%: 0.0 Blog 10/16/11
Consumer Price Index	Sep month ∆%: 0.5 Sep 12 month ∆%: 6.1 Jan-Sep ∆%: 5.7 Blog 10/16/11
Value Added of Industry	Sep 12 month ∆%: 13.8 Sep 2011/Sep 2010 ∆%: 13.8 Blog 10/23/11
GDP Growth Rate	Year IIIQ2011 ∆%: 9.1 Quarter IIQ2011 ∆%: 2.2 Blog 10/23/11
Investment in Fixed Assets	Total Jan-Sep ∆%: 24.9 Jan-Sep ∆% real estate development: 32.0 Blog 10/23/11
Retail Sales	Sep month ∆%: 1.3 Sep 12 month ∆%: 17.7 Jan-Sep ∆%: 17.0 Blog 10/23/11
Trade Balance	Sep balance $14.51 billion Exports ∆% 17.1 Imports ∆% 30.9 Blog 10/16/11

Links to blog comments in Table CNY:

10/09/11 http://cmpassocregulationblog.blogspot.com/2011/10/twenty-nine-million-unemployedunderempl.html

09/11/11 http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html

09/04/11 http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html

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

China’s GDP grew at a high rate of 9.1 percent in IIIQ2011, as shown in Table 30. Growth in China is driven by industry and services with rates of growth of 10.8 percent and 9.0 percent respectively.

Table 30, China, Growth Rate of GDP, ∆% Relative to a Year Earlier and ∆% Relative to Prior Quarter

	IQ2011	IIQ2011	IIIQ2011	IVQ2011
GDP	9.7	9.5	9.1
Primary Industry	3.5	3.2	3.8
Secondary Industry	11.1	11.0	10.8
Tertiary Industry	9.1	9.2	9.0
GDP ∆% Relative to a Prior Quarter	2.1	2.2

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/statisticaldata/Quarterlydata/

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111018_402759702.htm

Cumulative rates of value added of industry in China are provided in Table 31. In the first nine months of 2011, value added in total industry increased 14.2 percent relative to a year earlier and 13.8 percent in the 12 months ending in Sep. Heavy industry is the driver of growth with a rate of 14.3 percent in 12 months and 14.6 percent cumulative relative to a year earlier. Growth has decelerated somewhat from 14.9 percent in the 12 months ending in Feb but is not significantly different from 14.1 percent in Jan-Feb relative to a year earlier.

Table 31, China, Growth Rate of Value Added of Industry ∆%

2011	Industry	Light Industry	Heavy Industry	State Owned	Private
12 M Sep	13.8	12.8	14.3	9.9	16.0
Jan-Sep	14.2	13.1	14.6	10.4	16.1
12 M Aug	13.5	13.4	13.5	9.4	15.5
Jan-Aug	14.2	13.1	14.6	10.4	16.1
12 M Jul	14.0	12.8	14.5	9.5
Jan-Jul	14.3
12 M Jun	15.1	13.9	15.6	10.7	20.8
Jan-Jun	14.3	13.1	14.7	10.7	19.7
12 M May	13.3	12.9	13.5	8.9	18.7
Jan-May	14.0	12.9	14.4	10.7	19.3
12 M Apr	13.4	11.9	14.0	10.4	18.0
Jan-Apr	14.2	12.9	14.7	11.2	19.5
12 M Mar	14.8	12.8	15.6	12.9	19.2
Jan-Mar	14.4	13.1	14.9	11.4	19.8
12 M Feb	14.9	13.1	15.6	10.5	21.7
Jan-Feb	14.1	13.3	14.4	10.6	20.3

Source:

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111018_402759844.htm

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

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

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

Chart 35 of the National Bureau of Statistics of China shows an increase in the growth rate of industry from 13.3 percent in Sep 2010 to 14.8 percent in Mar 2011. Industrial growth has been around 14 percent.

Chart 35, China, Industrial Production Operation, 12 Months ∆%

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111018_402759702.htm

Yearly rates of growth for the past 12 months and cumulative relative to the earlier year of various segments of industrial production in China are provided in Table 32. Rates have fluctuated but remain above 10 percent with the exception of motor vehicles and crude oil.

Table 32, China, Industrial Production Operation ∆%

	Elec- tricity	Pig Iron	Cement	Crude Oil	Non- ferrous Metals	Motor Vehicles
12 M Sep	11.5	18.8	15.7	1.5	13.9	2.5
Jan-Sep	12.7	13.9	18.1	6.0	11.2	5.5
12 M Aug	10.0	12.9	12.8	4.5	15.6	9.5
Jan-Aug	13.0	13.1	18.4	6.6		4.7
12 M Jul	13.2	14.9	16.8	5.9	9.8	-1.3
Jan-Jul	13.3	13.0	19.2	6.9	9.9	4.0
12 M Jun	16.2	14.8	19.9	-0.7	9.8	3.6
12 M May	12.1	10.6	19.2	6.0	14.2	-1.9
12 M Apr	11.7	8.3	22.4	6.8	6.1	-1.6
12 M Mar	14.8	13.7	29.8	8.0	11.6	9.9
12 M Feb	11.7	14.5	9.1	10.9	14.4	10.3
12 M Jan	5.1	3.5	16.4	12.2	1.4	23.9
12 M Dec 2010	5.6	4.6	17.3	10.3	-1.9	27.6

M: month

Source:

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111018_402759844.htm

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

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

Monthly growth rates of industrial production in China are provided in Table 33. Monthly rates have fluctuated around 1 percent. The annual equivalent rate in the eight months from Feb to Sep is 14.9 percent.

Table 33, China, Industrial Production Operation, Month ∆%

2011	Month ∆%
Feb	0.98
Mar	1.18
Apr	0.97
May	1.01
Jun	1.42
Jul	0.91
Aug	1.02
Sep	1.20
AE ∆% Feb-Set	14.9

AE: annual equivalent

Source: http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111018_402759844.htm

Table 34 provides cumulative growth of investment in fixed assets in China in 2011 relative to 2010. Total fixed investment has grown at a high rate fluctuating around 25 percent and real estate development has grown at rates in excess of 33 percent. In Jan-Sep investment in fixed assets in China grew 24.9 percent relative to a year earlier and by 32.0 percent in real estate development.

Table 34, China, Investment in Fixed Assets ∆% Relative to a Year Earlier

	Total	State	Real Estate Development
Jan-Sep	24.9	12.7	32.0
Jan-Aug	25.0	12.1	33.2
Jan-Jul	25.4	13.6	33.6
Jan-Jun	25.6	14.6	32.9
Jan-May	25.8	14.9	34.6
Jan-Apr	25.4	16.6	34.3
Jan-Mar	25.0	17.0	34.1
Jan-Feb	24.9	15.6	35.2

Source:

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111018_402759856.htm

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

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

Chart 36 provides cumulative fixed asset investment in China relative to a year earlier. Growth rose to 25.8 percent in Jan-May and then fell back to 24.9 percent as in Jan-Sep.

Chart 36, China, Investment in Fixed Assets, Cumulative ∆% Cumulative Year Earlier

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111018_402759702.htm

Monetary policy has been used in China in the form of increases in interest rates and required reserves of banks to moderate real estate investment. Chart 37 show decline of fluctuating cumulative growth rates of investment in real estate development relative to a year earlier from 35.2 percent in Jan-Feb to 32.0 percent in Jan-Sep.

Chart 37, China, Investment in Real Estate Development, Cumulative ∆% Cumulative Year Earlier

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111018_402759702.htm

Table 35 provides monthly growth rates of investment in fixed assets in China from Feb to Sep 2011. There are two negative changes in Table 35 of minus 0.84 percent in Jun and minus 0.16 percent in Sep. Monthly rates have fluctuated from a low of 0.36 percent in May to a high of 2.36 percent in Apr. The average annual equivalent rate in the eight months from Feb to Sep is 10.6 percent.

Table 35, China, Investment in Fixed Assets, Month ∆%

	Month ∆%
Feb	0.75
Mar	1.82
Apr	2.36
May	0.36
Jun	-0.84
Jul	1.04
Aug	1.45
Sep	-0.16
AE ∆% Feb-Set	10.6

AE: annual equivalent

Source: http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111018_402759702.htm

Growth rates of retail sales in China monthly, 12 months and cumulative relative to a year earlier are in Table 36. The annual equivalent rate of growth from the monthly rates in Feb-Sep is 17.3 percent, which is close to 17.7 percent in 12 months in Sep and 17.0 in Jan-Sep 2011 relative to a year earlier.

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

	Month ∆%	12 Months ∆%	Cumulative ∆%/ Cumulative Year Earlier
Sep	1.3	17.7	17.0
Aug	1.4	17.0	16.9
Jul	1.3	17.2	16.8
Jun	1.4	17.7	16.8
May	1.3	16.9	16.6
Apr	1.4	17.1	16.5
Mar	1.3	16.3	17.4
Feb	1.3	11.6	15.8
Jan		19.9	19.9
AE ∆% Feb-Sep	17.3

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

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

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

Chart 38 shows 12 months growth rates of retail sales in China. Rates are quite high but somewhat lower than in the final months of 2010.

China 38, Total Retail Sales of Consumer Goods 12 Months ∆%

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111018_402759829.htm

IVD Euro Area. The Markit Eurozone Manufacturing PMI^® registered the weakest reading in 24 months of 48.5 in Sep (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8611). New orders fell at the highest rate in more than two years. The indexes for Italy (48.3), France (48.2), Ireland (47.3) and Spain (43.7) are the lows in 24 to 26 months while that of Greece (43.2) fell to a 7-month low. Chris Williamson, Chief Economist at Markit, finds that manufacturers face the weakest business environment in more than two years because of the joint occurrence of mediocre internal demand and declining export demand. The prospects are for further drop in production in coming months because of the acceleration of decline of new orders. The Markit Eurozone PMI^® Composite Output Index fell to 49.1 in Sep from 50.7 in Aug for the first decline in private sector activity in the euro area since Jul 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8613). The index average for IIIQ2011 registered 50.3, indicating stagnation of private-sector activity, falling below 55.6 in IIQ2011 and 57.6 in IQ2011. Chris Williamson, Chief Economist at Markit finds that the PMI reading for Sep shows the euro zone economy at standstill. The contraction of output in Sep suggests stagnation for the entire third quarter. The sharp decline in new business indicates possible contraction of GDP in the final quarter of 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8613). Table EUR provides the data table for the euro zone.

Table EUR, Euro Area Economic Indicators

GDP	IIQ2011 ∆% 0.2; IIQ2011/IIQ2010 ∆% 1.6 Blog 09/11/11
Unemployment	Aug 2011: 10.0% unemployment rate Aug 2011: 15.739 million unemployed Blog 10/02/11
HICP	Sep month ∆%: 0.8 12 months Sep ∆%: 3.0 Blog 010/16/11
Producer Prices	Euro Zone industrial producer prices Aug 12 months ∆%: 5.9 Blog 10/09/11
Industrial Production	Aug month ∆%: 1.2 Aug 12 months ∆%: 5.3 Blog 10/16/11
Industrial New Orders	Jul month ∆%: minus 2.1 Jul 12 months ∆%: 8.5 Blog 09/25/11
Construction Output	Jul month ∆%: 1.4 Jul 12 months ∆%: 1.2 Blog 09/25/11
Retail Sales	Aug month ∆%: minus 0.3 Aug 12 months ∆%: minus 1.0 Blog 10/09/11
Confidence and Economic Sentiment Indicator	Sentiment 95.0 Sep 2011 down from 107 in Dec 2010 Confidence minus 19.1 Sep 2011 down from minus 11 in Dec 2010 Blog 10/02/11
Trade	Jan-Aug 2011/2010 Exports ∆%: 15.2 Imports ∆%: 15.8 Blog 10/16/11
HICP, Rate of Unemployment and GDP	Historical from 1999 to 2011 Blog 09/04/11

Links to blog comments in Table EUR:

10/16/11 http://cmpassocregulationblog.blogspot.com/2011/10/odds-of-slowdown-or-recession-united.html

10/09/11 http://cmpassocregulationblog.blogspot.com/2011/10/twenty-nine-million-unemployedunderempl.html

10/02/11 http://cmpassocregulationblog.blogspot.com/2011/10/us-growth-standstill-at-08-percent.html

09/25/11 http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html

09/18/11 http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html

09/11/11 http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html

09/04/11 http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html

IVE Germany. The Markit/BME Germany Manufacturing PMI^® registered the lowest reading in two years at 50.3 in Sep, which is slightly lower than 50.9 in Aug (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8632). Tim Moore, Senior Economist at Markit, finds that manufacturing recovery in Germany is at standstill. There is support for the observation that growth may have peaked early in 2011 with weak prospects for the coming months because of the decline of new orders at the highest rate since the middle of 2009 particularly accentuated by weak export demand. The Germany Composite Output Index of the Markit Germany Services PMI^® fell from 51.3 in Aug to 50.5 in Sep. Manufacturing supported the composite index as the Germany Services Business Activity index fell from 51.1 in Aug to 49.7 in Sep (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8668). Tim Moore, Senior Economist at Markit, finds that Germany’s private sector experienced slowing activity in IIIQ2011 that is consistent with GDP stagnation. There is concern about the final quarter of 2011 because of the lack of drivers of economic activity. Table DE provides the data table for Germany.

Table DE, Germany, Economic Indicators

GDP	IIQ2011 0.1 ∆%; II/Q2011/IIQ2010 ∆% 2.7 Blog 09/11/11
Consumer Price Index	Sep month SA ∆%: 0.1 Aug 12 months ∆%: 2.6 Blog 10/16/11
Producer Price Index	Sep month ∆%: 0.4 12 months NSA ∆%: 5.5 Blog 10/23/11
Industrial Production	Aug month SA ∆%: minus 1.0 12 months NSA: 12.2 Blog 10/09/11
Machine Orders	Aug month ∆%: -2.8 Aug 12 months ∆%: 5.5 Blog 10/09/11
Retail Sales	Jul Month ∆% 0.0 12 Months ∆% minus 1.6 Blog 09/04/11
Employment Report	Employment Accounts: Aug Employed 12 months NSA ∆%: 1.3 Labor Force Survey: Aug Unemployment Rate: 5.9% Blog 10/02/11
Trade Balance	Exports Jul 12 month NSA ∆%: 4.4 (versus ∆% 3.1 Jun and 19.9 May) Imports Jul 12 months NSA ∆%: 9.9 (versus ∆% 6.0 Jun and 15.7 May) Exports Jul month SA ∆%: minus 1.8 percent, versus Jun minus 1.2; Imports Jul month SA minus 0.3∆% versus Jun 0.3 Blog 09/11/11

Links to blog comments in Table DE: 10/16/11 http://cmpassocregulationblog.blogspot.com/2011/10/odds-of-slowdown-or-recession-united.html

10/09/11 http://cmpassocregulationblog.blogspot.com/2011/10/twenty-nine-million-unemployedunderempl.html

10/02/11 http://cmpassocregulationblog.blogspot.com/2011/10/us-growth-standstill-at-08-percent.html

09/18/11 http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html

09/11/11 http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html

09/04/11 http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html

IVF France. The Markit France Composite Output Index of the Markit France Services PMI^® fell from 53.7 in Aug to a 26 month low while the Markit France Services Activity Index fell from 56.8 in Aug to 51.5 in Sep for a 25-month low (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8666). Jack Kennedy, Senior Economist at Markit, finds that output of the private sector of France moved close to stagnation in Sep. Manufacturing continued in contraction while the strength of services disappeared. The sovereign crisis in the euro zone and slowing world growth are eroding optimism that registered the lowest reading since Apr 2009. Table FR provides the data table for France.

Table FR, France, Economic Indicators

CPI	Sep month ∆% -0.1 12 months ∆%: 2.2 10/16/11
PPI	Aug month ∆%: 0.0 Aug 12 months ∆%: 6.3 Blog 10/02/11
GDP Growth	IIQ2011/IQ2011 ∆%: 0.0 IIQ2011/IIQ2010 ∆%: 1.6 Blog 10/02/11
Industrial Production	Aug/Jul SA ∆%: Industrial Production 0.5; Manufacturing 0.7 Aug 12 months NSA ∆%: Industrial Production 3.5; Manufacturing 4.2 Blog 10/16/11
Industrial New Orders	Mfg Aug/Jul ∆% 0.6 YOY ∆% 10.7 Blog 10/23/11
Consumer Spending	Aug Manufactured Goods ∆%: 0.1 Jun Manufactured Goods ∆%: 0.4 Blog 10/02/11
Employment	IIQ2011 Unemployed 2.580 million Unemployment Rate: 9.1% Employment Rate: 63.9% Blog 09/04/11
Trade Balance	Aug Exports ∆%: month 6.1, 12 months 10.4 Aug Imports ∆%: month 1.8, 12 months 8.4 Blog 10/09/11
Confidence Indicators	Historical averages 100 Oct: France 95 Mfg Business Climate 97 Retail Trade 94 Services 94 Building 99 Blog 10/23/11

Links to blog comments in Table FR:

10/16/11 http://cmpassocregulationblog.blogspot.com/2011/10/odds-of-slowdown-or-recession-united.html

10/09/11 http://cmpassocregulationblog.blogspot.com/2011/10/twenty-nine-million-unemployedunderempl.html

10/02/11 http://cmpassocregulationblog.blogspot.com/2011/10/us-growth-standstill-at-08-percent.html

09/25/11 http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html

09/18/11 http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html

09/11/11 http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html

09/04/11 http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html

The business climate survey of the Institut National de la Statistique et des Études Économiques (INSEE) of France finds deteriorating conditions in Oct. Table 37 shows the INSEE business climate indicator. The headline synthetic index has fallen to 97 in Oct, which is below the average since 1976. The final row shows the general production expectations falling to -29 in Oct, well below the average of -8 since 1976.

Table 37, France, Business Climate Indicator of Manufacturing of INSEE, General Balance of Opinion, SA

Mfg 2011	Average since 1976	Jul	Sep	Oct
Synthetic Index	100	105	99	97
Recent Changes in Output	5	15	6	0
Finished- Goods Inventory Level	13	1	11	13
Demand and Total Order Levels	-17	-10	-17	-18
Demand and Export Order Levels	-12	-5	-11	-19
Personal Production Expectations	5	6	4	4
General Production Expectations	-8	3	-29	-29

Source: http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20111021

Chart 39 of the Institut National de la Statistique et des Études Économiques (INSEE) provides the history of the business climate synthetic index of INSEE since 1992. The index falls during the contractions of 1991, 2001 and 2008. After rapid recovery beginning in 2009 the synthetic index shows declining trend in 2011.

Chart 39, France, INSEE Business Climate Synthetic Indicators

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20111021

Chart 40 of the Institut National de la Statistique et des Études Économiques (INSEE) shows strong drops of the turning point indicator in the recessions of 1991, 2001 and 2008. There have been other drops of this index. The turning point indicator has fallen to levels registered in the past contractions but rebounds slightly in Oct.

Chart 40, INSEE Business Climate Turning Point Indicator

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20111021

Chart 41 of the Institut National de la Statistique et des Études Économiques (INSEE) of France shows the indexes of general production expectations, personal production expectations and recent changes in output. All three indexes fell during the past three contractions after 1991, 2001 and 2008. The indexes are showing downward trend in 2011 that continued in Oct.

Chart 41, Climate General Production, Personal Production and Recent Changes in Output of INSEE

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20111021

The Business Climate Indicator for France of the INSEE business tendency surveys in Table 38 deteriorates slightly in Oct but is 10 points below its level in Jul, as shown in Table 38. Retail trade has fallen from 102 in Jul to 94 in Oct, which is slightly higher than 93 in Sep. Services has fallen from 103 in Jul to 94 in Oct, which is slightly lower than 95 in Sep.

Table 38, France, Confidence Indicators

2011	Average	Jul	Sep	Oct
France	100	105	96	95
Business Climate Mfg	100 since 1976	105	99	97
Household Confidence	100 between Jan 1987 and Dec 2010	82	80	NA
Wholesale trade Business Climate	100 since 1979	105	99	NA
Retail Trade	100	102	93	94
Services	100	103	95	94
Building	100	102	101	99

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=105&date=20111021

Industrial new orders are increasing in France, as shown in Table 39. Manufacturing new orders rose 0.6 percent in Aug relative to Jul after 1.3 percent in Jul relative to Jun. Growth in the quarter Jun-Aug relative to the prior quarter was 2.1 percent and 10.7 percent relative to a year earlier. Manufacturing orders not originating in France also rose 0.6 percent in Aug after 2.8 percent in Jul

Table 39, France, Industrial New Orders, ∆%

	Aug/Jul	Jul/Jun	Quarter on Quarter	Year on Year
Mfg	0.6	1.3	2.1	10.7
Mfg Non-Domestic	0.6	2.8	0.5	8.7
Electric and Electronic	-0.6	0.8	2.4	10.8
Motor Vehicles	1.8	-0.6	2.5	10.9
Other Mfg	0.6	2.1	1.9	10.7

Notes: Mfg: Manufacturing;

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=91&date=20111020

IVG Italy. The seasonally adjusted Markit/ADACI Business Activity Index of the Markit/ADACI Italy Services PMI^® fell from 48.4 in Aug to 45.8 in Sep for the fourth consecutive month of decline (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8670). Phil Smith, economist at Markit, finds that the quarterly average of the index is the lowest in the 13 years of the survey. The impact of the euro zone sovereign crisis and new austerity measures restricted business inflows. Table IT provides the data table for Italy.

Table IT, Italy, Economic Indicators

Consumer Price Index	Sep month ∆%: 0.0 Sep 12 months ∆%: 3.0 Blog 10/16/11
Producer Price Index	Jul month ∆%: 0.0 Aug 12 months ∆%: 4.5 Blog 10/02/11
GDP Growth	IIQ2011/IIQ2010 SA ∆%: 0.8 IIQ2011/IQ2011 NSA ∆%: 0.3 Blog 09/11/11
Labor Report	Jul 2011 Participation rate 62% Employment ratio 56.9% Unemployment rate 8.0% Blog 09/04/11
Industrial Production	Aug month ∆%: 4.3 12 months ∆%: 4.7 Blog 10/16/11
Retail Sales	Jul month ∆%: -0.1 Jul 12 months ∆%: -2.4 Blog 09/25/11
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 Aug SA -€ 2707 million versus Jul -€ 2440 Exports Aug month SA ∆%: 0.1; Imports Aug month SA ∆%: 0.9 Exports 12 months NSA ∆%: 16.2 Imports 12 months NSA ∆%: 12.5 Blog 10/16/11

Links to blog comments in Table IT:

10/16/11 http://cmpassocregulationblog.blogspot.com/2011/10/odds-of-slowdown-or-recession-united.html

10/09/11 http://cmpassocregulationblog.blogspot.com/2011/10/twenty-nine-million-unemployedunderempl.html

10/02/11 http://cmpassocregulationblog.blogspot.com/2011/10/us-growth-standstill-at-08-percent.html

09/25/11 http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html

09/18/11 http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html

09/11/11 http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html

09/04/11 http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html

IVH United Kingdom. The Markit/CIPS UK Manufacturing PMI^®rose to 51.1 in Sep away from the contraction level of 49.4 in Aug for the first reading above 50 in three months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8631). The average reading of the PMI in IIIQ2011 of 50 is substantially lower than 59.4 in IIQ2011, which was close to a record, and 52.7 in IIQ2011. David Noble, Chief Executive Officer at the Chartered Institute of Purchasing & Supply finds improvement after the low of 26 months registered in Aug. The concern is with falling export orders resulting from the weak global economy and especially conditions in the euro zone. The seasonally adjusted Business Activity Index of the Markit/CIPS UK Services PMI^® rose from 51.1 in Aug, which was an eight-month low, to 52.9 in Sep (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8669). There has been growth for nine consecutive months but the average in IIIQ2011 of 53.1 is the weakest quarterly level in 2011. Table UK provides the data table for the United Kingdom.

Table UK, UK Economic Indicators


CPI	Sep month ∆%: 0.6 Sep 12 months ∆%: 5.2 Blog 10/23/11
Output/Input Prices	Output Prices: Sep 12 months NSA ∆%: 6.3; excluding food, petroleum ∆%: 3.8 Input Prices: Sep 12 months NSA ∆%: 17.5 Excluding ∆%: 13.3 Blog 10/09/11
GDP Growth	IIQ2011 prior quarter ∆% 01; year earlier same quarter ∆%: 0.6 Blog 10/09/11
Industrial Production	Aug 2011/Aug 2010 NSA ∆%: Industrial Production -1.0; Manufacturing 1.5 Blog 10/16/11
Retail Sales	Sep month SA ∆%: 0.6 Sep 12 months ∆%: 0.6 Blog 10/23/11
Labor Market	May-Jul Unemployment Rate: 8.1% Blog 10/16/11
Trade Balance	Balance Aug -₤1,877 million Exports Aug ∆%: 0.5 Jun/Aug ∆%: 9.8 Imports Aug ∆%: -0.5 Jun/Aug ∆%: 6.4 Blog 10/16/11

Links to blog comments in Table UK:

10/23/11 http://cmpassocregulationblog.blogspot.com/2011/10/odds-of-slowdown-or-recession-united.html

10/09/11 http://cmpassocregulationblog.blogspot.com/2011/10/twenty-nine-million-unemployedunderempl.html

09/25/11 http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html

09/18/11 http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html

09/11/11 http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html

09/04/11 http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html

The volume of retail sales in the UK rose 0.6 percent in Sep and also 0.6 percent in the 12 months ending in Sep, as shown in Table 41. The annual equivalent rate in Jan-Sep is 0.7 percent.

Table 41, UK, Volume of Retail Sales ∆%

	Month SA ∆%	12 Months ∆%
Sep 2011	0.6	0.6
Aug	-0.2	-0.8
Jul	-0.2	-0.7
Jun	-0.2	-0.6
May	-0.4	-0.5
Apr	0.2	0.0
Mar	0.2	-0.4
Feb	0.2	-0.6
Jan	0.1	-1.1
AE ∆% Jan-Sep	0.7
Dec 2010	-0.3	-1.1

Source: http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-231496

Retail sales in the UK struggle with relatively high inflation. Table 42 provides the 12 month percentage change of the implied deflator of UK retail sales. The implied deflator of retail sales rose 4.8 percent in the 12 months ending in Sep while that of sales excluding fuel rose 3.3 percent. Both 12 months percentage changes of implied deflators for total sales and excluding fuel were lower in Sep. The implied deflator of auto fuel rose to 17.0 in Sep, which is the highest 12 month increase in 2011. The percentage change of the implied deflator of sales of food stores is also higher than for total sales at 6.0 percent is higher than for total retail sales. Increases in fuel prices at the retail level have occurred throughout most years since 2005 as shown in Table 10.

Table 42, UK, 12 Months Rates Implied Deflator of Retail Sales ∆%

	All Retail	Ex Auto Fuel	Food Stores	Non- Food	Auto Fuel
Sep 2011	4.8	3.3	6.0	1.2	17.0
Aug	5.2	3.8	5.9	2.0	16.3
Jul	4.9	3.6	5.9	1.9	14.5
Jun	4.4	3.1	6.0	0.8	14.5
May	4.4	3.2	5.5	1.5	13.2
Apr	4.1	3.1	4.7	1.7	12.3
Mar	4.1	2.7	4.2	1.5	15.0
Feb	4.7	3.3	5.4	1.6	15.1
Jan	3.8	2.6	5.3	0.8	14.5
Dec 2010	3.1	2.4	5.1	0.6	12.4
Dec 2009	3.4	2.0	2.1	1.3	17.0
Dec 2008	-0.5	0.2	6.9	-4.4	9.7
Dec 2007	1.7	0.4	3.9	-2.0	15.4
Dec 2006	1.0	0.8	3.3	-1.1	1.1
Dec 2005	-0.3	-1.0	1.3	-2.6	6.6

Source: http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-233940

Chart 43 of the UK Office for National Statistics provides the retail sales index of the UK from Jul 2010 to Sep 2011. Retail sales have trended upwardly into Sep.

Chart 43, UK, Retail Sales Index SA

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/rsi/retail-sales/september-2011/sum.html

UK monthly retail volume of sales is quite volatile, as shown in Table 43. Growth of total volume of sales in Sep by 0.6 percent interrupted monthly declines since May. While food store sale were flat and fuel sales fell 0.2 percent, nonfood sales rose 1.4 percent.

Table 43, UK, Growth of Retail Sales Volume by Component Groups Month ∆%

	All Retail	Ex Auto Fuel	Food Stores	Non- Food	Auto Fuel
Sep 2011	0.6		0.0	1.4	-0.2
Aug	-0.2	-0.3	0.5	-0.8	0.1
Jul	-0.2	-0.3	-0.3	-0.2	0.2
Jun	-0.2	-0.1	0.1	-0.3	-0.1
May	-0.4	-0.5	-0.9	0.0	0.1
Apr	0.2	0.3	0.6	0.0	0.0
Mar	0.2	0.3	0.6	0.0	-0.2
Feb	0.0	-0.1	-0.4	0.2	-0.1
Jan	0.1	0.0	-0.2	-0.3	-0.3
Dec 2010	-0.3	-0.2	0.0	0.1	-0.4

Source: http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-233940

Percentage growth in 12 months of retail sales volume by component groups in the UK is provided in Table 44. Total retail sales grew 0.6 percent in Sep but with decline of 0.3 percent in food stores and decline of 0.7 in nonfood stores while auto fuel rose 2.8 percent.

Table 44, UK, Growth of Retail Sales Volume by Component Groups 12 Month ∆%

	All Retail	Ex Auto Fuel	Food Stores	Non- Food	Auto Fuel
Sep 2011	0.6		-0.3	-0.7	2.8
Aug	-0.8	-0.9	0.3	-1.5	-0.2
Jul	-0.7	-0.7	-0.4	-0.7	-0.5
Jun	-0.6	-0.8	-0.5	-0.5	-0.6
May	-0.5	-0.5	-0.3	-0.3	-0.4
Apr	0.0	-0.1	0.6	-0.4	0.0
Mar	-0.4	-0.4	0.1	-0.5	-0.5
Feb	-0.6	-0.7	-0.4	-0.6	0.0
Jan	-1.1	-1.3	-0.4	-1.2	0.2
Dec 2010	-1.0	-1.1	-0.1	-1.4	1.7
Dec 2009	-0.3	-0.1	0.0	-0.2	-0.1
Dec 2008	-0.3	-0.2	-0.5	0.0	0.1

Source: http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-233940

While volume of retail sales shrinks or grows moderately, value driven by inflation rises sharply. Table 45 provides the analysis of the UK Office for National Statistics of contributions in percentage points to growth of value of 5.4 percent in the 12 months ending in Sep. The drivers of percentage change in 12 months of value of retail sales are food stores with contribution of 2.4 percentage points, non-specialized stores with 0.3 percentage points and automotive fuel stores with contribution of 2.0 percentage points.

Table 45, UK, Value of Retail Sales 12-month ∆% and Percentage Points Contributions by Sectors

Sep 2011	Weight % of All Retailing	Value SA 12 Months ∆%	PP Contribution % points
All Retailing	100.00	5.4
Mostly Food Stores	41.7	5.7	2.4
Mostly Nonfood Stores
Total	43.2	0.4	0.2
Non- specialized	7.8	4.4	0.3
Textile, Clothing & Footwear	12.2	0.4	0.0
Household Goods Stores	9.7	-2.0	-0.2
Other	13.5	-0.1	0.0
Non-store Retailing	4.9	15.6	0.8
Automotive Fuel	10.2	20.0	2.0

Source: http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-233940

Table 46 provides the analysis by the UK Office for National Statistics of contributions of percentage points to the growth of retail sales volume of 0.6 percent in the 12 months ending in Sep. The drivers of volume of retail sales increases were non-store retailing with 0.8 percentage points, non-specialized stores with 0.3 percentage points and automotive fuel with 0.3 percentage points.

Table 46, UK, Volume of Retail Sales 12-month ∆% and Percentage Points Contributions by Sectors

Sep 2011	Weight % of All Retailing	Volume SA 12 Months ∆%	PP Contribution % points
All Retailing	100.00	0.6
Mostly Food Stores	41.7	-0.3	-0.1
Mostly Nonfood Stores
Total	43.2	-0.7	-0.3
Non- specialized	7.8	4.0	0.3
Textile, Clothing & Footwear	12.2	-2.1	-0.3
Household Goods Stores	9.7	-1.6	-0.2
Other	13.5	-1.6	-0.2
Non-store Retailing	4.9	15.5	0.8
Automotive Fuel	10.2	2.2	0.3

Source: http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-233940

V 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 47 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 47 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 16.5 percent by Fri Oct 21, 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, misallocating resources toward less productive economic activities and disrupting financial markets. The last row of Table 47 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 47, 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	10/21 /2011
Rate	1.1423	1.5914	1.192	1.389
CNY/USD	01/03 2000	07/21 2005	7/15 2008	10/21 2011
Rate	8.2798	8.2765	6.8211	6.3838
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://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata

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 48 extracts four rows of Table 47 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 50 below, the dollar has devalued again to USD 1.389/EUR or by 16.5 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 6.3338/USD on Fri Oct 21, 2011, or by an additional 6.4 percent, for cumulative revaluation of 22.9 percent. The Dow Jones Newswires informs on Oct 15 that the premier of China Wen Jiabao announced that the Chinese yuan will not be further appreciated to prevent adverse effects on exports (http://professional.wsj.com/article/SB10001424052970203914304576632790881396896.html?mod=WSJ_hp_LEFTWhatsNewsCollection). The policy appears to be implemented because the rate of CNY 6.3838/USD on Oct 21, 2011, amounts to a small depreciation of 0.1 percent relative to the rate of CNY 6.379/USD a week earlier on Oct 14, 2011. Meanwhile, the Senate of the US is proceeding with a bill on China’s trade that could create a confrontation but may not be approved by the entire Congress.

Table 48, 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	10/21 /2011
Rate	1.1423	1.5914	1.192	1.389
CNY/USD	01/03 2000	07/21 2005	7/15 2008	10/21 2011
Rate	8.2798	8.2765	6.8211	6.3838

Source: Table 47

Dollar devaluation did not eliminate the US current account deficit, which is projected by the International Monetary Fund (IMF) with the new database of Sep 2011 at 3.1 percent of GDP in 2011 and at 2.2 percent of GDP in 2015, as shown in Table 49. Revaluation of the CNY has not reduced the current account surplus of China, which is projected by the IMF to increase from 5.2 percent of GDP in 2011 to 7.0 percent of GDP in 2015.

Table 49, Fiscal Deficit, Current Account Deficit and Government Debt as % of GDP and 2011 Dollar GDP

	GDP $B 2011	FD %GDP 2011	CAD %GDP 2011	Debt %GDP 2011	FD%GDP 2015	CAD%GDP 2015	Debt %GDP 2015
US	15065	-7.9	-3.1	72.6	-3.1	-2.2	86.7
Japan	5855	-8.9	2.5	130.5	-8.4	2.4	160.0
UK	2481	-5.7	-2.7	72.9	0.4	-0.9	75.2
Euro	13355	-1.5	0.1	68.6	1.5	0.5	69.3
Ger	3629	0.4	5.0	56.9	2.1	4.7	55.3
France	2808	-3.4	-2.7	80.9	-2.5	0.6	83.9
Italy	2246	0.5	-3.5	100.4	4.5	-2.0	96.7
Can	1759	-3.7	-3.3	34.9	0.3	-2.6	35.1
China	6988	-1.6	5.2	22.2	0.1	7.0	12.9
Brazil	2518	3.2	-2.3	38.6	2.9	-3.2	34.1

Note: GER = Germany; Can = Canada; FD = fiscal deficit; CAD = current account deficit

FD is primary except total for China; Debt is net except gross for China

Source: http://www.imf.org/external/pubs/ft/weo/2011/02/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 47 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 50, 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 10/21/11,” which has been recently stalling or reversing amidst profound risk aversion. “Let’s twist again” monetary policy during the week of Sep 23 caused deep worldwide risk aversion and selloff of risk financial assets. Monetary policy was designed to increase risk appetite but instead suffocated risk exposures. Recovering risk financial assets in column “∆% Trough to 10/21/11” are in the range from 2.7 percent for the Shanghai Composite and 21.9 percent for the DJIA. Michael Mackenzie and Robin Wigglesworth, writing on Oct 21, 2011, on “Us earnings tell story of resilience,” published in the Financial Times (http://www.ft.com/intl/cms/s/0/c44187d4-fb1f-11e0-bebe-00144feab49a.html#axzz1bVlVmY6d), analyze the strong earnings performance of US companies that explains the recovery of the DJIA by 21.9 percent from the trough and of the S&P 500 by 21.1 percent. Mackenzie and Wigglesworth quote S&P Capital IQ that a blended average of actual and forecast earnings on IIIQ2011 relative to IIIQ2010 could show growth of 14.6 percent. The carry trade from zero interest rates to leveraged positions in risk financial assets had proved strongest for commodity exposures but US equities have regained leadership. Before the current round of risk aversion, all assets in the column “∆% Trough to 10/21/11” had double digit gains relative to the trough around Jul 2, 2010. There are now only three valuations lower than those at the trough around Jul 2: European stocks index STOXX 50 is now 0.9 percent below the trough on Jul 2, 2010; the NYSE Financial Index is 2.5 percent below the trough on Jul 2, 2010; and Japan’s Nikkei Average is 1.6 percent below the trough on Aug 31, 2010 and 23.8 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 8678.89 on Fri Oct 21, which is 15.4 percent below 10,254.43 on Mar 11 on the date of the Great East Earthquake/tsunami. Global risk aversion erased the earlier gains of the Nikkei. Germany’s DAX is 5.4 percent above the trough on Apr 25, 2010. The dollar depreciated by 16.5 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 10/21/2011” shows gains for equities in the US and in Europe but declines for equities in Asia and the DJ UBS Commodities index. 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 50 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 10/21/11” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Oct 21, 2011. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 10/21/11” but also relative to the peak in column “∆% Peak to 10/21/11.” There are now only two indexes above the peak: DJIA by 5.4 percent, and S&P 500 by 1.1 percent. There are several indexes well below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 22.3 percent, Nikkei Average by 23.8 percent, Shanghai Composite by 26.8 percent, STOXX 50 by 15.9 percent, Dow Global by 11.5 percent and Dow Asia Pacific by 8.9 percent. The DJ UBS Commodities index is now behind the peak on Jan 6, 2010 by 0.1 percent. The factors of risk aversion have adversely affected the performance of risk financial 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 50, Stock Indexes, Commodities, Dollar and 10-Year Treasury

	Peak	Trough	∆% to Trough	∆% Peak to 10/21 /11	∆% Week 10/ 21/11	∆% Trough to 10/ 21/11
DJIA	4/26/ 10	7/2/10	-13.6	5.4	1.4	21.9
S&P 500	4/23/ 10	7/20/ 10	-16.0	1.7	1.1	21.1
NYSE Finance	4/15/ 10	7/2/10	-20.3	-22.3	2.1	-2.5
Dow Global	4/15/ 10	7/2/10	-18.4	-11.5	0.1	8.4
Asia Pacific	4/15/ 10	7/2/10	-12.5	-8.9	-0.7	3.9
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-23.8	-0.8	-1.6
China Shang.	4/15/ 10	7/02 /10	-24.7	-26.8	-4.7	2.7
STOXX 50	4/15/10	7/2/10	-15.3	-15.9	0.4	-0.8
DAX	4/26/ 10	5/25/ 10	-10.5	-5.7	0.1	5.3
Dollar Euro	11/25 2009	6/7 2010	21.2	8.2	-0.1	-16.5
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	-0.1	-2.2	16.9
10-Year Tre.	4/5/ 10	4/6/10	3.986	2.220

T: trough; Dollar: positive sign appreciation relative to euro (less dollars paid per euro), negative sign depreciation relative to euro (more dollars paid per euro)

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

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 51 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 51 for Oct 21 shows that the S&P 500 is now 2.2 percent above the Apr 26, 2010 level and the DJIA is 5.4 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 as zero interest rates and quantitative easing have not had any effects in recovering economic activity while distorting financial markets and resource allocation.

Table 51, Percentage Changes of DJIA and S&P 500 in Selected Dates

2010	∆% DJIA from prior date	∆% DJIA from Apr 26	∆% S&P 500 from prior date	∆% S&P 500 from Apr 26
Apr 26
May 6	-6.1	-6.1	-6.9	-6.9
May 26	-5.2	-10.9	-5.4	-11.9
Jun 8	-1.2	-11.3	2.1	-12.4
Jul 2	-2.6	-13.6	-3.8	-15.7
Aug 9	10.5	-4.3	10.3	-7.0
Aug 31	-6.4	-10.6	-6.9	-13.4
Nov 5	14.2	2.1	16.8	1.0
Nov 30	-3.8	-3.8	-3.7	-2.6
Dec 17	4.4	2.5	5.3	2.6
Dec 23	0.7	3.3	1.0	3.7
Dec 31	0.03	3.3	0.07	3.8
Jan 7	0.8	4.2	1.1	4.9
Jan 14	0.9	5.2	1.7	6.7
Jan 21	0.7	5.9	-0.8	5.9
Jan 28	-0.4	5.5	-0.5	5.3
Feb 4	2.3	7.9	2.7	8.1
Feb 11	1.5	9.5	1.4	9.7
Feb 18	0.9	10.6	1.0	10.8
Feb 25	-2.1	8.3	-1.7	8.9
Mar 4	0.3	8.6	0.1	9.0
Mar 11	-1.0	7.5	-1.3	7.6
Mar 18	-1.5	5.8	-1.9	5.5
Mar 25	3.1	9.1	2.7	8.4
Apr 1	1.3	10.5	1.4	9.9
Apr 8	0.03	10.5	-0.3	9.6
Apr 15	-0.3	10.1	-0.6	8.9
Apr 22	1.3	11.6	1.3	10.3
Apr 29	2.4	14.3	1.9	12.5
May 6	-1.3	12.8	-1.7	10.6
May 13	-0.3	12.4	-0.2	10.4
May 20	-0.7	11.7	-0.3	10.0
May 27	-0.6	11.0	-0.2	9.8
Jun 3	-2.3	8.4	-2.3	7.3
Jun 10	-1.6	6.7	-2.2	4.9
Jun 17	0.4	7.1	0.04	4.9
Jun 24	-0.6	6.5	-0.2	4.6
Jul 1	5.4	12.3	5.6	10.5
Jul 8	0.6	12.9	0.3	10.9
Jul 15	-1.4	11.4	-2.1	8.6
Jul 22	1.6	13.2	2.2	10.9
Jul 29	-4.2	8.4	-3.9	6.6
Aug 05	-5.8	2.1	-7.2	-1.0
Aug 12	-1.5	0.6	-1.7	-2.7
Aug 19	-4.0	-3.5	-4.7	-7.3
Aug 26	4.3	0.7	4.7	-2.9
Sep 02	-0.4	0.3	-0.2	-3.1
Sep 09	-2.2	-1.9	-1.7	-4.8
Sep 16	4.7	2.7	5.4	0.3
Sep 23	-6.4	-3.9	-6.5	-6.2
Sep 30	1.3	-2.6	-0.4	-6.7
Oct 7	1.7	-0.9	2.1	-4.7
Oct 14	4.9	3.9	5.9	1.0
Oct 21	1.4	5.4	1.1	2.2

Source: http://professional.wsj.com/mdc/public/page/mdc_us_stocks.html?mod=mdc_topnav_2_3014

Table 52, 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 now zero interest rates indefinitely but with interruptions caused by risk aversion events. Such an event actually occurred in the week of Sep 23 reversing the devaluation of the dollar in the form of sharp appreciation of the dollar relative to other currencies from all over the world including the offshore Chinese yuan market. Column “Peak” in Table 52 shows exchange rates during the crisis year of 2008. There was a flight to safety in dollar-denominated government assets as a result of the arguments in favor of TARP (Cochrane and Zingales 2009). This is evident in various exchange rates that depreciated sharply against the dollar such as the South African rand (ZAR) at the peak of depreciation of ZAR 11.578/USD on Oct 22, 2008, subsequently appreciating to the trough of ZAR 7.238/USD by Aug 15, 2010 but now depreciating by 10.9 percent to ZAR 8.028/USD on Oct 21, which is still 30.7 percent stronger than on Oct 22, 2008. An example from Asia is the Singapore Dollar (SGD) highly depreciated at the peak of SGD 1.553/USD on Mar 3, 2009 but subsequently appreciating by 13.2 percent to the trough of SGD 1.348/USD on Aug 9, 2010 but is now only 5.6 percent stronger at SGD 1.272/USD on Oct 21 relative to the trough of depreciation but still stronger by 18.1 percent relative to the peak of depreciation on Mar 3, 2009. Another example is the Brazilian real (BRL) that depreciated at the peak to BRL 2.43 on Dec 5, 2008 but appreciated to the trough at BRL 1.737/USD on Apr 30, 2010, showing depreciation of 2.2 percent relative to the trough to BRL 1.775/USD on Oct 21 but still stronger by 26.9 percent relative to the peak on Dec 5, 2008. At one point in 2011 the Brazilian real traded at BRL 1.55/USD and in the week of Sep 23 surpassed BRL 1.90/USD in intraday trading for depreciation of more than 20 percent. The monetary policy committee (COPOM) of the Banco Central do Brasil, Brazil’s central bank, lowered the policy rate by another 50 basis points on Oct 19, 2011 (http://www.bcb.gov.br/textonoticia.asp?codigo=3268&IDPAI=NEWS):

“Brasília - Continuing the process of adjustment of monetary conditions, the Copom unanimously decided to reduce the Selic rate to 11.50 percent, without bias. The Copom understands that, by promptly mitigating the effects stemming from a more restrictive global environment, a moderate adjustment in the basic rate level is consistent with the scenario of convergence to inflation to the target in 2012.”

Unconventional monetary policy of zero interest rates and quantitative easing creates trends such as the depreciation of the dollar followed by Table 52 but with abrupt reversals during risk aversion. The main effects of unconventional monetary policy are on valuations of risk financial assets and not necessarily on consumption and investment or aggregate demand.

Table 52, Exchange Rates

	Peak	Trough	∆% P/T	Oct 21, 2011	∆T Oct 21 2011	∆P Oct 21 2011
EUR USD	7/15 2008	6/7 2010		10/21 2011
Rate	1.59	1.192		1.389
∆%			-33.4		14.2	-14.5
JPY USD	8/18 2008	9/15 2010		10/21 2011
Rate	110.19	83.07		76.261
∆%			24.6		8.2	30.8
CHF USD	11/21 2008	12/8 2009		10/21 2011
Rate	1.225	1.025		0.883
∆%			16.3		13.9	27.9
USD GBP	7/15 2008	1/2/ 2009		10/21 2011
Rate	2.006	1.388		1.594
∆%			-44.5		12.9	-25.9
USD AUD	7/15 2008	10/27 2008		10/21 2011
Rate	1.0215	1.6639		1.038
∆%			-62.9		42.1	5.7
ZAR USD	10/22 2008	8/15 2010		10/21 2011
Rate	11.578	7.238		8.028
∆%			37.5		-10.9	30.7
SGD USD	3/3 2009	8/9 2010		10/21 2011
Rate	1.553	1.348		1.272
∆%			13.2		5.6	18.1
HKD USD	8/15 2008	12/14 2009		10/21 2011
Rate	7.813	7.752		7.781
∆%			0.8		-0.4	0.4
BRL USD	12/5 2008	4/30 2010		10/21 2011
Rate	2.43	1.737		1.775
∆%			28.5		-2.2	26.9
CZK USD	2/13 2009	8/6 2010		10/21 2011
Rate	22.19	18.693		17.945
∆%			15.7		4.0	19.1
SEK USD	3/4 2009	8/9 2010		10/21 2011
Rate	9.313	7.108		6.558
∆%			23.7		7.7	29.6
CNY USD	7/20 2005	7/15 2008		10/21 2011
Rate	8.2765	6.8211		6.3838
∆%			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://professional.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000

http://federalreserve.gov/releases/h10/Hist/dat00_ch.htm

Table 53, 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 53. 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. Monetary policy 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 Great East Earthquake and Tsunami in Japan and now again by the sovereign risk doubts in Europe and the growth recession in the US and the world. The yield of 2.220 percent at the close of market on Fr Oct 14, 2011 would be equivalent to price of 103.6141 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 2.3 percent relative to the price on Nov 4, 2010, one day after the decision on the second program of quantitative easing. If inflation accelerates, yields of Treasury securities may rise sharply. Yields are not observed without special yield-lowering effects such as the flight into dollars caused by the events in the Middle East, continuing purchases of Treasury securities by the Fed, the tragic Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 affecting Japan, recurring fears on European sovereign credit issues and worldwide risk aversion in the week of Sep 30 caused by “let’s twist again” monetary policy. The realization of a growth standstill recession is also influencing yields. Important causes of the earlier rise in yields shown in Table 53 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 Oct 19, 2011, the line “Reserve Bank credit” in the Fed balance sheet stood at $2835 billion, or $2.8 trillion, with portfolio of long-term securities of $2613 billion, or $2.6 trillion, consisting of $1575 billion Treasury nominal notes and bonds, $68 billion of notes and bonds inflation-indexed, $108 billion Federal agency debt securities and $862 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1569 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 II World Financial Turbulence, 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 53, Yield, Price and Percentage Change to November 4, 2010 of Ten-Year Treasury Note

Date	Yield	Price	∆% 11/04/10
05/01/01	5.510	78.0582	-22.9
06/10/03	3.112	95.8452	-5.3
06/12/07	5.297	79.4747	-21.5
12/19/08	2.213	104.4981	3.2
12/31/08	2.240	103.4295	2.1
03/19/09	2.605	100.1748	-1.1
06/09/09	3.862	89.8257	-11.3
10/07/09	3.182	95.2643	-5.9
11/27/09	3.197	95.1403	-6.0
12/31/09	3.835	90.0347	-11.1
02/09/10	3.646	91.5239	-9.6
03/04/10	3.605	91.8384	-9.3
04/05/10	3.986	88.8726	-12.2
08/31/10	2.473	101.3338	0.08
10/07/10	2.385	102.1224	0.8
10/28/10	2.658	99.7119	-1.5
11/04/10	2.481	101.2573	-
11/15/10	2.964	97.0867	-4.1
11/26/10	2.869	97.8932	-3.3
12/03/10	3.007	96.7241	-4.5
12/10/10	3.324	94.0982	-7.1
12/15/10	3.517	92.5427	-8.6
12/17/10	3.338	93.9842	-7.2
12/23/10	3.397	93.5051	-7.7
12/31/10	3.228	94.3923	-6.7
01/07/11	3.322	94.1146	-7.1
01/14/11	3.323	94.1064	-7.1
01/21/11	3.414	93.4687	-7.7
01/28/11	3.323	94.1064	-7.1
02/04/11	3.640	91.750	-9.4
02/11/11	3.643	91.5319	-9.6
02/18/11	3.582	92.0157	-9.1
02/25/11	3.414	93.3676	-7.8
03/04/11	3.494	92.7235	-8.4
03/11/11	3.401	93.4727	-7.7
03/18/11	3.273	94.5115	-6.7
03/25/11	3.435	93.1935	-7.9
04/01/11	3.445	93.1129	-8.0
04/08/11	3.576	92.0635	-9.1
04/15/11	3.411	93.3874	-7.8
04/22/11	3.402	93.4646	-7.7
04/29/11	3.290	94.3759	-6.8
05/06/11	3.147	95.5542	-5.6
05/13/11	3.173	95.3387	-5.8
05/20/11	3.146	95.5625	-5.6
05/27/11	3.068	96.2089	-4.9
06/03/11	2.990	96.8672	-4.3
06/10/11	2.973	97.0106	-4.2
06/17/11	2.937	97.3134	-3.9
06/24/11	2.872	97.8662	-3.3
07/01/11	3.186	95.2281	-5.9
07/08/11	3.022	96.5957	-4.6
07/15/11	2.905	97.5851	-3.6
07/22/11	2.964	97.0847	-4.1
07/29/11	2.795	98.5258	-2.7
08/05/11	2.566	100.5175	-0.7
08/12/11	2.249	103.3504	2.1
08/19/11	2.066	105.270	3.7
08/26/11	2.202	103.7781	2.5
09/02/11	1.992	105.7137	4.4
09/09/11	1.918	106.4055	5.1
09/16/11	2.053	101.5434	0.3
09/23/11	1.826	107.2727	5.9
09/30/11	1.912	106.4602	5.1
10/07/11	2.078	104.9161	3.6
10/14/11	2.251	103.3323	2.0
10/21/11	2.220	103.6141	2.3

Note: price is calculated for an artificial 10-year note paying semi-annual coupon and maturing in ten years using the actual yields traded on the dates and the coupon of 2.625% on 11/04/10

Source:

http://professional.wsj.com/mdc/public/page/mdc_bonds.html?mod=mdc_topnav_2_3000

VI Economic Indicators. Crude oil input in refineries fell to 15,032 thousand barrels per day on average in the four weeks ending on Oct 7 from 14,807 thousand barrels per day in the four weeks ending on Oct 14, as shown in Table 54. The rate of capacity utilization in refineries continues at a relatively high level of 85.7 percent on Oct 14, 2011, which is slightly higher than on Oct 15, 2010 at 83.3 percent but slightly lower than 87.0 on Oct 10, 2011. Imports of crude oil fell from 8,924 thousand barrels per day on average to 8,816 thousand barrels per day. Decreasing utilization in refineries with decreasing imports resulted in decrease of commercial crude oil stocks by 4.7 million barrels from 337.6 million barrels on Oct 10 to 333.9 million barrels on Oct 14. Gasoline stocks fell 3.3 million barrels and stocks of fuel oil fell 4.3 million barrels. Supply of gasoline fell from 9,019 thousand barrels per day on Oct 15, 2010, to 8,883 thousand barrels per day on Oct 14, 2011, or by 1.5 percent, while fuel oil supply rose 5.8 percent. Part of the fall in consumption of gasoline is due to higher prices and part to the growth recession. Table 54 also shows increase in the world price of crude oil by 31.3 percent from Oct 15, 2010 to Oct 14, 2011. Gasoline prices rose 22.7 percent from Oct 18, 2010 to Oct 17, 2011. Increases in prices of crude oil and gasoline relative to a year earlier are moderating because year earlier prices are already reflecting the commodity price surge and commodity prices have been declining recently during worldwide risk aversion.

Table 54, US, Energy Information Administration Weekly Petroleum Status Report

Four Weeks Ending Thousand Barrels/Day	10/14/11	10/07/11	10/15/10
Crude Oil Refineries Input	14,807	15,032	14,176
Refinery Capacity Utilization %	85.7	87.0	83.3
Motor Gasoline Production	9,198	9,139	8,925
Distillate Fuel Oil Production	4,505	4,528	4,233
Crude Oil Imports	8,816	8,924	8,632
Motor Gasoline Supplied	8,883 ∆% 2011/2010= –1.5%	8,948	9,019
Distillate Fuel Oil Supplied	4,042 ∆% 2011/2010 = 5.8%	3,965	3,820
	10/14/11	10/07/11	10/15/10
Crude Oil Stocks Million B	332.9 ∆= -4.7 MB	337.6	361.2
Motor Gasoline Million B	206.3 ∆= -3.3 MB	209.6	219.3
Distillate Fuel Oil Million B	149.7 ∆= -4.3 MB	154.0	170.1
World Crude Oil Price $/B	106.18 ∆% 2011/2010 31.3	99.96	80.85
	10/17/11	10/10/11	10/18/10
Regular Motor Gasoline $/G	3.476 ∆% 2011/2010 22.7	3.417	2.834

B: barrels; G: gallon

Source:

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

Chart 44 of the US Energy Information Administration shows the commercial stocks of crude oil of the US. There have been fluctuations around an upward trend since 2005. Crude oil stocks have trended downwardly in the past few weeks with an increase in the week of Oct 7.

Chart 44, US, Weekly Crude Oil Ending Stocks

Source: US Energy Information Administration

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

Chart 45 of the US Energy Information Administration provides closer view of US crude oil stocks since Dec 2009. Crude oil stocks rose in a clear trend throughout 2010 but began to drop on a downward trend since May 2011. There is less need to stock oil after May with declining prices if it is anticipated that prices in future months may be lower.

Chart 45, Crude Oil Futures

Source: US Energy Information Administration

http://www.eia.gov/petroleum/

Chart 46 of the US Energy Information Administration shows the price of WTI crude oil since the 1980s. Chart 46 captures commodity price shocks during the past decade. The costly mirage of deflation was caused by the decline in oil prices resulting from the recession of 2001. The upward trend after 2003 was promoted by the carry trade from near zero interest rates. The jump above $140/barrel during the global recession in 2008 can only be explained by the carry trade promoted by monetary policy of zero fed funds rate. After moderation of risk aversion, the carry trade returned with resulting sharp upward trend of crude prices.

Chart 46, US, Crude Oil Futures Contract

Source: US Energy Information Administration

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCLC1&f=D

There is significant difference between initial claims for unemployment insurance adjusted and not adjusted for seasonality provided in Table 55. Seasonally adjusted claims fell 6000 from 409,000 on Oct 8 to 403,000 on Oct 15. Claims not adjusted for seasonality fell 47,229 from 404,054 on Oct 8 to 356,825 on Oct 15. Seasonal adjustment changed decrease in initial claims from 47,229 to decrease of 6000.

Table 55, US, Initial Claims for Unemployment Insurance

2011	SA	NSA	4-week MA SA
Oct 15	403,000	356,825	403,000
Oct 8	409,000	404,054	409,250
Change	-6,000	-47,229	-6,250
Oct 1	405,000	332,394	415,000
Prior Year	452,000	394,016	453,500

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

Source:

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

Table 56 provides seasonally and not seasonally adjusted claims in the comparable week for the years from 2000 to 2011. Seasonally adjusted claims typically exceed claims not adjusted for seasonality. Claims not seasonally adjusted have decline from 464,985 on Oct 17, 2009 to 356,825 on Oct 15, 2011 but are much higher than 271,863 on October 14, 2006.

Table 56, US, Unemployment Insurance Weekly Claims

	Not Seasonally Adjusted Claims	Seasonally Adjusted Claims
Oct 14, 2000	255.082	299,000
Oct 13, 2001	426,881	482,000
Oct 12, 2002	385,689	405,000
Oct 18, 2003	328,572	387,000
Oct 16, 2004	279,846	327,000
Oct 15, 2005	303,158	348,000
Oct 14, 2006	271,863	305,000
Oct 13, 2007	305,619	336,000
Oct 18, 2008	416,114	481,000
Oct 17, 2009	464,985	538,000
Oct 16, 2010	394,016	452,000
Oct 15, 2011	356,825	403,000

Source

http://workforcesecurity.doleta.gov/unemploy/finance.asp

VII 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 57 provides inflation of the CPI. In Jan-Sep 2011, CPI inflation for all items seasonally adjusted was 4.1 percent in annual equivalent, that is, compounding inflation in the first eight months and assuming it would be repeated during the remainder of 2011. In the 12 months ending in Sep, CPI inflation of all items not seasonally adjusted was 3.9 percent. The second row provides the same measurements for the CPI of all items excluding food and energy: 2.4 percent annual equivalent in Jan-Sep and 2.0 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 virtually zero, 0.05 percent for six months, 0.11 percent for 12 months, 0.27 percent for two years, 0.52 percent for three years, 1.14 percent for five years, 1.73 percent for seven years, 2.22 percent for ten years and 3.26 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 57. 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 57, US, Consumer Price Index Percentage Changes 12 months NSA and Annual Equivalent ∆%

	∆% 12 Months Sep 2011/Aug 2010 NSA	∆% Annual Equivalent Jan-Sep 2011 SA
CPI All Items	3.9	4.1
CPI ex Food and Energy	2.0	2.4

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

VII Conclusion. The US economy is in growth standstill at an annual equivalent rate in the first half of 0.8 percent. Real disposable income has stagnated. Nominal personal income fell in Aug. There are around 29 million people in the US unemployed or underemployed. Real wages are falling. There is no exit from unemployment, underemployment and falling real wages because of the collapse of hiring. The euro is fighting for survival. The crucial issue of “let’s twist again “monetary policy is if lowering the yields of long-term Treasury securities would have any impact on investment and consumption or aggregate demand. The decline of long-term yields of Treasury securities would have to cause decline of yields of asset-backed securities used to securitize loans for investment by firms and purchase of durable goods by consumers. The decline in costs of investment and consumption of durable goods would ultimately have to result in higher investment and consumption. It is possible that the decline in yields captured by event studies is ephemeral. The decline in yields just after “let’s twist again” monetary policy was caused by the flight out of risk financial assets into Treasury securities, which is the opposite of the desired effect of encouraging risk-taking in asset-backed securities and lending. The yield curve has edged upwardly in spite of “let’s twist again monetary policy” (Go to http://cmpassocregulationblog.blogspot.com/ http://sites.google.com/site/economicregulation/carlos-m-pelaez)

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

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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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Sunday, October 23, 2011

Prosperity without Inflation, World Financial Turbulence and Global Slowdown

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