CMP Associates Regulation Blog: Twenty Nine Million Unemployed/Underemployed, Falling Real Wages, World Financial Turbulence and World Economic Slowdown

Twenty Nine Million Unemployed/Underemployed, Falling Real Wages, World Financial Turbulence and World Economic Slowdown

Carlos M. Pelaez

Executive Summary

I Twenty Nine Million Unemployed/Underemployed

II Falling Real Wages

III World Financial Turbulence

IV Global Inflation

V World Economic Slowdown

VA United States

VB Japan

VC China

VD Euro Area

VE Germany

VF France

VG Italy

VH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

Appendix I The Great Inflation

Executive Summary

The employment situation report of the Bureau of Labor Statistics (BLS) is rich in useful information on the state of the economy. Table 1 anticipated here from the text summarizes the report released on Oct 7. Nonfarm payroll jobs in the survey of employing establishments registered an increase in new jobs of 103,000 in Sep from 57,000 in Aug that was revised from 0. New private payroll jobs rose 137,000 in Sep, which was an improvement relative to the revised increase of 42,000 in Aug. Part of the increase in new jobs was due to the return to work of striking workers: “The increase in employment partially reflected the return to payrolls of about 45,000 telecommunications workers who had been on strike in August” (http://www.bls.gov/news.release/pdf/empsit.pdf 1). The establishment survey also provides average hourly earnings and average weekly hours worked. Average hourly earnings (AHE) without adjustment for inflation rose 1.9 percent in Sep 2011 relative to Sep 2010 and 0.2 percent relative to Aug 2011. Table 1 also provides the BLS calculation of AHEs in constant dollars, or adjusted for inflation, which fell 1.9 percent in Sep 2011 relative to Sep 2010 and fell 0.6 percent relative to Aug 2011. Average weekly hours fell from 34.2 in Aug to 34.3 in Sep. The wage bill or number of hours worked times average hourly earnings fell in real terms. The remuneration to labor is falling after adjusting for inflation. The BLS also conducts a survey of households that provides the rate of unemployment, or unemployed as percent of the labor force, which was 9.1 percent in both Sep and Aug. The rate of job creation would have to exceed around 125,000 per month of new entrants in the labor force to reduce the rate of unemployment. This blog provides with release of every employment situation report an estimate of the number in job stress, which is 29.4 million in Sep and 29.5 million in Aug. The number of people in job stress as percent of the labor force is estimated at 18.5 percent in Sep 2011 and 18.6 percent in Aug 2011. The average rate of 2.4 percent seasonally-adjusted average rates (SAAR) of economic growth in the current recovery is mediocre relative to 6.2 percent average GDP SAARs in past recoveries. As a result there are more than 29 million people unemployed, working part-time for economic reasons because they cannot find full-time employment or marginally attached to the labor force. The rate of economic growth in the first half of 2011 is equivalent to 0.8 percent for a full year. The fractured job market of the US continues to deteriorate.

A few charts illustrate the situation of the labor market of the United States. Chart 1 of the dataset of the Bureau of Labor Statistics (BLS) anticipated here from the text shows strong recovery in creation of seasonally-adjusted total nonfarm payroll jobs, including private and government jobs, in the earlier cyclical expansion from much lower drop in output in 2001 and the sharper drop and milder job creation impulse in the current cyclical recovery.

Chart 1, US, Total Nonfarm Payroll Jobs SA 2001-2011

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Chart 3 anticipated here from the text provides total nonfarm payroll job creation between 1979 and 1989 seasonally adjusted. The two contraction in 1980 and 1981 to 1982 accumulated decline of GDP of 4.8 percent that is similar to the drop of GDP of 5.1 percent from IVQ2007 to IIQ2009. Recovery of job creation was incomparably faster than during the current cyclical expansion after IIIQ2009.

Chart 3, US, Total Nonfarm Payroll Jobs SA 1979-1989

Source: US Bureau of Labor Statistics

Total private payroll job creation, excluding government jobs, seasonally-adjusted, is provided in Chart 5 anticipated here from the text for the years between 2001 and 2011. Private sector job creation is not moving as fast as required to reduce job stress of 29 million people.

Chart 5, US, Total Private Payroll Jobs SA 2001-2011

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Chart 7 anticipated here from the text shows the upward surge of total private job creation seasonally adjusted in the years 1979 to 1989. Much faster economic growth was followed with rapid private job creation.

Chart 7, US, Total Private Payroll Jobs SA 1979-1989

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

The deterioration of purchasing power of the average hourly earnings of US workers is shown by Chart 11 of the US Bureau of Labor Statistics anticipated here from the text. Chart 11 plots average hourly earnings of all US employees in constant 1982-1984 dollars with evident decline from 2010 to 2011.

Chart 11, US, Average Hourly Earnings of All Employees 1982-1984 Dollars

Source: Bureau of Labor Statistics http://www.bls.gov/data/

Chart 9 shows the decline of real disposable income during the recession followed by stagnation. The US has lost the growth impulse of prior cyclical expansions that permitted rapid hiring and elimination of unemployment. As a result, there are more than 29 million unemployed or working part-time because they cannot find full-time employment.

Chart 9, US, Real Disposable Income, 2007-2011

Source: http://www.bea.gov/national/index.htm#personal

The lack of opportunities for exiting unemployment and underemployment and for those employed the futility of the search for advancement from declining earnings constitutes a major socio-economic disaster.

I Twenty Nine Million Unemployed/Underemployed. The employment situation report of the Bureau of Labor Statistics (BLS) is rich in useful information on the state of the economy. Table 1 summarizes the report released on Oct 7. Nonfarm payroll jobs in the survey of employing establishments registered an increase in new jobs of 103,000 in Sep from 57,000 in Aug that was revised from 0. New private payroll jobs rose 137,000 in Sep, which was an improvement relative to the revised increase of 42,000 in Aug. Part of the increase in new jobs was due to the return to work of striking workers: “The increase in employment partially reflected the return to payrolls of about 45,000 telecommunications workers who had been on strike in August” (http://www.bls.gov/news.release/pdf/empsit.pdf 1). The establishment survey also provides average hourly earnings and average weekly hours worked. Average hourly earnings (AHE) without adjustment for inflation rose 1.9 percent in Sep 2011 relative to Sep 2010 and 0.2 percent relative to Aug 2011. Table 1 also provides the BLS calculation of AHEs in constant dollars, or adjusted for inflation, which fell 1.9 percent in Sep 2011 relative to Sep 2010 and fell 0.6 percent relative to Aug 2011. Average weekly hours fell from 34.2 in Aug to 34.3 in Sep. The wage bill or number of hours worked times average hourly earnings fell in real terms. The remuneration to labor is falling after adjusting for inflation. The BLS also conducts a survey of households that provides the rate of unemployment, or unemployed as percent of the labor force, which was 9.1 percent in both Sep and Aug. The rate of job creation would have to exceed around 125,000 per month of new entrants in the labor force to reduce the rate of unemployment. This blog provides with release of every employment situation report an estimate of the number in job stress, which is 29.4 million in Sep and 29.5 million in Aug. The number of people in job stress as percent of the labor force is estimated at 18.5 percent in Sep 2011 and 18.6 percent in Aug 2011. The average rate of 2.4 percent seasonally-adjusted average rates (SAAR) of economic growth in the current recovery is mediocre relative to 6.2 percent average GDP SAARs in past recoveries. As a result there are more than 29 million people unemployed, working part-time for economic reasons because they cannot find full-time employment or marginally attached to the labor force. The rate of economic growth in the first half of 2011 is equivalent to 0.8 percent for a full year. The fractured job market of the US continues to deteriorate.

Table 1, US, Summary of the Employment Situation Report SA

	Sep	Aug
New Nonfarm Payroll Jobs	103,000	57,000
New Private Payroll Jobs	137,000	42,000
Average Hourly Earnings	$23.12 ∆% Sep11/Sep 10: 1.9 ∆% Sep11/Aug11: 0.2	$23.08 ∆% Aug11/Aug 10: 1.8 ∆% Aug 11/Jul 11: –0.2
Average Hourly Earnings in Constant Dollars	$10.20 ∆% Sep 11/Sep 10: –1.9% ∆% Sep 11/Aug 11: –0.6	$10.26 ∆% Aug 11/Aug 10: –1.3 ∆% Aug 11/Jul 11: 0.0
Average Weekly Hours	34.3	34.2
Unemployment Rate Household Survey % of Labor Force	9.1	9.1
Number in Job Stress Unemployed and Underemployed Blog Calculation	29.4 million NSA	29.5 million NSA
In Job Stress as % Labor Force	18.5	18.6

Source: Tables 2, 3, 4, 8 and 9.

The Bureau of Labor Statistics (BLS) released the employment situation report on Fri Oct 7 showing an unchanged seasonally adjusted rate of unemployment, or unemployed as percent of the labor force, of 9.1 percent in Sep 2011, which is identical to 9.1 percent in Aug and Jul 2011 (http://www.bls.gov/news.release/pdf/empsit.pdf). There are two approaches to calculating the number of people in job stress. The first approach of calculating the number of people in job stress unemployed or underemployed in Table 2 is 25.8 million seasonally-adjusted in Sep, compared with 25.4 million in Aug and 25.1 million in Jul. The number in job stress unemployed or underemployed of 25.8 million in Sep is composed of 13.9 million unemployed (of whom 6.2 million, or 44.6 percent, unemployed for 27 weeks or more) compared with 13.9 million unemployed in Aug (of whom 6.0 million, or 43.2 percent, unemployed for 27 weeks or more), 9.3 million employed part-time for economic reasons in Sep (who suffered reductions in their work hours or could not find full-time employment) compared with 8.8 million in Aug and 2.5 million who were marginally attached to the labor force in Sep (who were not in the labor force but wanted and were available for work) compared with 2.6 million in Aug.

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

	Sep	Aug	Jul
Unemployed Millions	13.992	13.967	13.931
Unemployed ≥27 weeks Millions	6.242	6.034	6.185
Unemployed ≥27 weeks %	44.6	43.2	44.4
Part Time Economic Reasons Millions ∆% Sep/Aug: +440 thousand	9.270	8.826	8.396
Marginally Attached to Labor Force Millions ∆% Sep/Aug: -64 thousand	2.511	2.575	2.785
Job Stress Millions ∆% Sep/Aug: +405 thousand	25.773	25.368	25.112
Unemploy- ment Rate	9.1	9.1	9.1

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

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

In an article published by the Financial Times, Feldstein (2011Jul25) calculates 29 million Americans who are unable to find the job they desire. Comments in this blog have been providing a calculation of unemployed or underemployed in the US of around 29 million. Additional information provides deeper insight on the fractured job market of the US. Table 3 consists of data and additional calculations using the BLS household survey, illustrating the possibility that the actual rate of unemployment could be 11.6 percent and the number of people in job stress could be closer to 30 million, which is 18.5 percent of the labor force. The first column provides for 2006 the yearly average population (POP), labor force (LF), participation rate or labor force as percent of population (PART %), employment (EMP), employment population ratio (EMP/POP %), unemployment (UEM), the unemployment rate as percent of labor force (UEM/LF Rate %) and the number of people not in the labor force (NLF). The numbers in column 2006 are averages in millions while the monthly numbers for Aug 2010 and Aug and Jul 2011 are in thousands, not seasonally adjusted. The average yearly participation rate of the population in the labor force was in the range of 62.0 percent minimum to 67.1 percent maximum between 2000 and 2006 with the average of 66.4 percent (ftp://ftp.bls.gov/pub/special.requests/lf/aa2006/pdf/cpsaat1.pdf). The objective of Table 3 is to assess how many people could have left the labor force because they do not think they can find another job. Row “LF PART 66.2 %” applies the participation rate of 2006, almost equal to the rates for 2000 to 2006, to the population in Sep 2010 and Aug and Sep 2011 to obtain what would be the labor force of the US if the participation rate had not changed. In fact, the participation rate fell to 64.6 percent by Sep 2010 and was 64.3 percent in Aug 2011 and 64.2 percent in Sep 2011, suggesting that many people simply gave up on finding another job. Row “∆ NLF UEM” calculates the number of people not counted in the labor force because they could have given up on finding another job by subtracting from the labor force with participation rate of 66.2 percent (row “LF PART 66.2%”) the labor force estimated in the household survey (row “LF”). Total unemployed (row “Total UEM”) is obtained by adding unemployed in row “∆NLF UEM” to the unemployed of the household survey in row “UEM.” The row “Total UEM%” is the effective total unemployed “Total UEM” as percent of the effective labor force in row “LF PART 66.2%.” The results are that: (1) there are an estimated 4.905 million unemployed who are not counted because they left the labor force on their belief they could not find another job (∆NLF UEM); (2) the total number of unemployed is effectively 18.425 million (Total UEM) and not 13.520 million (UEM) of whom many have been unemployed long term; (3) the rate of unemployment is 11.6 percent (Total UEM%) and not 8.8 percent, not seasonally adjusted, or 9.1 percent seasonally adjusted; and (4) the number of people in job stress is close to 30 million by adding the 4.905 million leaving the labor force because they believe they could not find another job. The row “In Job Stress in Table 3 provides the number of people in job stress not seasonally adjusted at 29.359 million in Sep 2011, adding the total number of unemployed (“Total UEM”), plus those involuntarily in part-time jobs because they cannot find anything else (“Part Time Economic Reasons”) and the marginally attached to the labor force (“Marginally attached to LF”). The final row of Table 3 shows that the number of people in job stress is equivalent to 18.5 percent of the labor force. The employment population ratio “EMP/POP %” dropped from 62.9 percent on average in 2006 to 58.6 percent in Sep 2010, 58.5 percent in Aug 2011 and 58.5 percent in Sep 2011 and the number employed (EMP) dropped from 144 million to 140 million. What really matters for labor input in production and wellbeing is the number of people with jobs or the employment/population ratio, which has declined and does not show signs of increasing. There are almost four million fewer people working in 2011 than in 2006 and the number employed is not increasing. The number of hiring relative to the number unemployed measures the chances of becoming employed. The number of hiring in the US economy has declined by 17 million and does not show signs of increasing (http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html http://cmpassocregulationblog.blogspot.com/2011/03/slow-growth-inflation-unemployment-and.html see section IV Hiring Collapse in http://cmpassocregulationblog.blogspot.com/2011/08/world-financial-turbulence-global.html http://cmpassocregulationblog.blogspot.com/2011/06/increasing-risk-aversion-analysis-of.html).

Table 3, US, Population, Labor Force and Unemployment, NSA

	2006	Sep 2010	Aug 2011	Sep 2011
POP	229	238,322	239,871	240,071
LF	151	153,854	154,344	154,022
PART%	66.2	64.6	64.3	64.2
EMP	144	139,715	140,335	140,502
EMP/POP%	62.9	58.6	58.5	58.5
UEM	7	14,140	14,008	13,520
UEM/LF Rate%	4.6	9.2	9.1	8.8
NLF	77	84,468	85,528	86,049
LF PART 66.2%		157,769	158,795	158,927
∆NLF UEM		3,915	4,451	4,905
Total UEM		18,055	18,459	18,425
Total UEM%		11.4	11.6	11.6
Part Time Economic Reasons		8,540	8,463	8,423
Marginally Attached to LF		2,548	2,575	2,511
In Job Stress		29,143	29,497	29,359
People in Job Stress as % Labor Force		18.5	18.6	18.5

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

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

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

Sources:

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

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

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

Total nonfarm payroll employment seasonally adjusted (SA) rose 103,000 in Aug and private payroll employment rose by 137,000. Table 4 provides the monthly change in jobs seasonally adjusted in the prior strong contraction of 1981-1982 and the recovery in 1983 into 1984 and in the contraction of 2008-2009 and in the recovery in 2009 to 2011. All revisions have been incorporated in Table 4. The data in the recovery periods are in relief to facilitate comparison. There is significant bias in the comparison. The average yearly civilian noninstitutional population was 174.2 million in 1983 and the civilian labor force 111.6 million, growing by 2009 to an average yearly civilian noninstitutional population of 235.8 million and civilian labor force of 154.1 million, that is, increasing by 35.4 percent and 38.1 percent, respectively (http://www.bls.gov/cps/cpsaat1.pdf). Total nonfarm payroll jobs in 1983 were 90.280 million, jumping to 94.530 million in 1984 while total nonfarm jobs in 2010 were 129.818 million declining from 130.807 million in 2009 (http://www.bls.gov/webapps/legacy/cesbtab1.htm ). What is striking about the data in Table 4 is that the numbers of monthly increases in jobs in 1983 are several times higher than in 2010 to 2011 even with population higher by 35.4 percent and labor force higher by 38.1 percent in 2009 relative to 1983 nearly three decades ago and total number of jobs in payrolls rose by 39.5 million in 2010 relative to 1983 or by 43.8 percent.. Growth has been mediocre in the six quarters of expansion beginning in IIIQ2009 in comparison with earlier expansions (http://cmpassocregulationblog.blogspot.com/2011/10/us-growth-standstill-at-08-percent.html http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/06/financial-risk-aversion-slow-growth.html http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/05/mediocre-growth-world-inflation.html http://cmpassocregulationblog.blogspot.com/2011/03/slow-growth-inflation-unemployment-and.html http://cmpassocregulationblog.blogspot.com/2011/02/mediocre-growth-raw-materials-shock-and.html) and also in terms of what is required to reduce the job stress of at least 25 million persons but likely close to 30 million. Some of the job growth and contraction in 2010 in Table 4 is caused by the hiring and subsequent layoff of temporary workers for the 2010 census.

Table 4, US, Monthly Change in Jobs, Number SA

Month	1981	1982	1983	2008	2009	2010	Private
Jan	95	-327	225	13	-820	-39	-42
Feb	67	-6	-78	-83	-726	-35	-21
Mar	104	-129	173	-72	-796	192	144
Apr	74	-281	276	-185	-660	277	229
May	10	-45	277	-233	-386	458	48
Jun	196	-243	378	-178	-502	-192	65
Jul	112	-343	418	-231	-300	-49	93
Aug	-36	-158	-308	-267	-231	-59	110
Sep	-87	-181	1114	-434	-236	-29	109
Oct	-100	-277	271	-509	-221	171	143
Nov	-209	124	352	-802	-55	93	128
Dec	-278	-14	356	-619	-130	152	167
			1984			2011	Private
Jan			447			68	94
Feb			479			235	261
Mar			275			194	219
Apr			363			217	241
May			308			53	99
Jun			379			20	75
Jul			312			127	173
Aug			241			57	42
Sep			311			103	137
Oct			286
Nov			349
Dec			127

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

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

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

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

The following eight charts provide the comparison of job creation in the current cyclical expansion with that of recovery from a similar drop in GDP in the 1980s. Chart 1 of the dataset of the Bureau of Labor Statistics (BLS) shows strong recovery in creation of seasonally-adjusted total nonfarm payroll jobs, including private and government jobs, in the earlier cyclical expansion from much lower drop in output in 2001 and the sharper drop and milder job creation impulse in the current cyclical recovery

Chart 1, US, Total Nonfarm Payroll Jobs SA 2001-2011

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Chart 2 provides total nonfarm job creation in 2001 to 2011 without seasonal adjustment. The curve is smoothed by seasonal adjustment. The current recovery is weaker.

Chart 2, US, Total Nonfarm Payroll Jobs NSA 2001-2011

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Chart 3 provides total nonfarm payroll job creation between 1979 and 1989 seasonally adjusted. The two contraction in 1980 and 1981 to 1982 accumulated decline of GDP of 4.8 percent that is similar to the drop of GDP of 5.1 percent from IVQ2007 to IIQ2009. Recovery of job creation was incomparably faster than during the current cyclical expansion after IIIQ2009.

Chart 3, US, Total Nonfarm Payroll Jobs SA 1979-1989

Source: US Bureau of Labor Statistics

The curve of job creation without seasonal adjustment in 1979-1989 is shown in Chart 4. There are fluctuations around a sharp upward trend of recovery of employment.

Chart 4, US, Total Nonfarm Payroll Jobs NSA 1979-1989

Source: US Bureau of Labor Statistics

Total private payroll job creation, excluding government jobs, seasonally-adjusted, is provided in Chart 5 for the years between 2001 and 2011. Private sector job creation is not moving as fast as required to reduce job stress of 29 million people.

Chart 5, US, Total Private Payroll Jobs SA 2001-2011

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Total private job creation is shown in Chart 6 without seasonal adjustment in 2001-2011. The data illustrate the fact observed from hiring in the JOLTS report. The current recovery is characterized by much weaker hiring by the private sector that is the opportunity for exiting unemployment/underemployment and advancing in real income. Private sector hiring has fallen by 17 million yearly without signs of recovery.

Chart 6, US, Total Private Payroll Jobs NSA 2001-2011

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Chart 7 shows the upward surge of total private job creation seasonally adjusted in the years 1979 to 1989. Much faster economic growth was followed with rapid private job creation.

Chart 7, US, Total Private Payroll Jobs SA 1979-1989

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Finally, Chart 8 shows total private job creation not seasonally adjusted. Fluctuations occurred around a sharp upward trend of private job creation.

Chart 8, US Total Private Payroll Jobs NSA 1979-1989

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Important aspects of growth of payroll jobs from Sep 2010 to Sep 2011, not seasonally adjusted (NSA), are provided in Table 5. Total nonfarm employment increased by 1,462,000 (row A), consisting of growth of total private employment by 1,789,000 (row B) and decline by 327,000 of government employment (row C). Monthly average growth of private payroll employment has been 149,0833, which is mediocre relative to 25 to 30 million in job stress, while total nonfarm employment has grown on average by only 121,833 per month. These monthly rates of job creation are insufficient to meet the demands of new entrants in the labor force and thus perpetuate unemployment and underemployment. Manufacturing employment increased by 195,000 while private service providing employment grew by 1,459,000. The employment situation report of the Bureau of Labor Statistics informs that (http://www.bls.gov/news.release/pdf/empsit.pdf 2): “Employment in professional and business services increased by 48,000 over the month [of Sep 2011] and has grown by 897,000 since a recent low in September 2009. Employment in temporary help services edged up in September; this industry has added 53,000 jobs over the past 3 months.” An important feature is that jobs in temporary help services increased by 170,000. This episode of jobless recovery is characterized by part-time jobs and creation of jobs that are inferior to those that have been lost. Monetary and fiscal stimuli fail to increase consumption in a fractured job market. An important characteristic is that the losses of government jobs have been high in local government, 243,000 jobs lost in that past twelve months (row C3 Local), because of the higher number of employees in local government, 13.8 million relative to 5.1 million in state jobs and 2.8 million in federal jobs.

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

	Sep 2010	Sep 2011	Change
A Total Nonfarm	130,090	131,552	1,462
B Total Private	108,004	109,793	1,789
B1 Goods Producing	18,105	18,435	330
B1a Manu-facturing	11,628	11,823	195
B2 Private service providing	89,899	91,358	1,459
B2a Professional and Business Services	16,801	17,350	549
B2b Temporary help services	2,181	2,351	170
C Government	22,086	21,759	-327
C1 Federal	2,863	2,827	-36
C2 State	5,146	5,098	-48
C3 Local	14,077	13,834	-243

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

Source:

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

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

Table 6, Total Nonfarm Employment in Thousands

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

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

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

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

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

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

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

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

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

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

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

II Falling Real Wages. The wage bill is the average weekly hours times the earnings per hour. Table 8 provides the estimates by the BLS of earnings per hour seasonally adjusted, increasing from $22.70/hour in Sep 2010 to $23.12/hour in Sep 2011, or by 1.9 percent. There is disappointment in valuation of stocks about the pace of wage increases because of rising food and energy costs that inhibit consumption and thus sales and similar concern about growth of consumption that accounts for 70 percent of GDP. Average private weekly earnings increased slightly by $16.68 from $776.34 in Sep 2010 to $793.02 in Sep 2011 or by 2.1 percent. The inflation-adjusted wage bill can only be calculated for Aug, which is the most recent month for which there are estimates of the consumer price index. Earnings per hour rose from $22.67 in Aug 2010 to $23.08 in Aug 2011 or by 1.8 percent (http://www.bls.gov/data/) and were equal in Sep 2011 at $23.12; average weekly earnings declined from $793.02 in Jul 2011 to $789.34 in Aug, 2011 and were equal at $793.02 in Sep 2011. The number of average weekly hours was unchanged from 34.2 in Aug 2010 to 34.2 in Aug 2011 or by 0.0 percent (http://www.bls.gov/data/). The wage bill rose 1.99 percent in the 12 months ending in Aug, 2011:

{[(wage bill in Aug 2011)/(wage bill in Aug 2010)-1]100 = [($23.12x34.2)/($22.67x34.2)-1]100

= [($790.70/$$775.31)-1]100} = 1.99%

CPI inflation was 3.8 percent in the 12 months ending in Aug 2011 (http://www.bls.gov/news.release/cpi.nr0.htm) for an inflation-adjusted wage-bill decline of 1.7 percent :{[(1.0199/1.038)-1]100}. Energy and food price increases are similar to a “silent tax” that is highly regressive, harming the most those with lowest incomes. There are concerns that the wage bill would deteriorate in purchasing power because of renewed raw materials shock in the form of increases in prices of commodities such as the 31.1 percent steady increase in the DJ-UBS Commodity Index from Jul 2, 2010 to Sep 2, 2011. The charts of four commodity price indexes by Bloomberg show steady increase since Jul 2, 2010 that was interrupted briefly only in Nov with the sovereign issues in Europe triggered by Ireland, in Mar by the earthquake and tsunami in Japan and in the beginning of May by the decline in oil prices and the sovereign risk difficulties in Europe (http://www.bloomberg.com/markets/commodities/futures/).

Table 8, Earnings per Hour and Average Weekly Hours SA

Earnings per Hour	Sep 2010	Jul 2011	Aug 2011	Sep 2011
Total Private	$22.70	$23.12	$23.08	$23.12
Goods Producing	$24.15	$24.45	$24.43	$24.46
Service Providing	$22.36	$22.80	$22.76	$22.80
Average Weekly Earnings
Total Private	$776.34	$793.02	$789.34	$793.02
Goods Producing	$958.76	$973.11	$972.31	$975.95
Service Providing	$740.12	$759.24	$753.36	$756.96
Average Weekly Hours
Total Private	34.2	34.3	34.2	34.3
Goods Producing	39.7	39.8	39.8	39.9
Service Providing	33.1	33.3	33.1	33.2

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

Chart 9 provides average weekly hours of all employees from 2006 to 2011 seasonally adjusted. The data are in current dollar, that is, without adjusting for inflation, which is provided below. Average weekly hours in nominal or current dollars collapsed during the global recession, rose sharply in the early phase of recovery and now are trendless or stagnated.

Chart 9, US, Average Weekly Hours of All Employees 2006-2011 SA

Source: Bureau of Labor Statistics

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

Chart 10 provides average weekly earnings of all employees in the US. There is an upward trend throughout the months from 2006 to 2011 with perhaps flattening in the last few months.

Chart 10, US, Average Weekly Earnings of All Employees, SA 2006-2011

Source: Bureau of Labor Statistics

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

Calculations with BLS data of inflation-adjusted average hourly earnings are shown in Table 9. The final column of Table 9 (“12 Month Real ∆%”) provides inflation-adjusted average hourly earnings of all employees in the US. Average hourly earnings rose above inflation throughout the first eight months of 2007 just before the global recession that began in the final quarter of 2007. In contrast, average hourly earnings of all US workers have risen less than inflation in most months in 2010 and 2011 and the loss has accelerated to 1.9 percent in Aug 2011, which is the most recent month for which there are consumer price index data.

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

	AHE ALL	12 Month Nominal ∆%	∆% 12 Month CPI	12 Month Real ∆%
2007
Jan*	$20.70*	4.2*	2.1	2.1*
Feb*	$20.79*	4.1*	2.4	1.7*
Mar	$20.78	3.6	2.8	0.8
Apr	$20.85	3.5	2.6	0.7
May	$20.89	3.8	2.7	1.1
Jun	$21.00	3.8	2.7	1.1
Jul	$21.04	3.7	2.4	1.3
Aug	$21.03	3.5	1.9	1.6
2010
Jan	$22.44	1.9	2.6	-0.7
Feb	$22.48	1.9	2.1	-0.2
Mar	$22.48	1.8	2.3	-0.5
Apr	$22.52	1.8	2.2	-0.4
May	$22.57	1.9	2.0	-0.1
Jun	$22.57	1.8	1.1	0.7
Jul	$22.61	1.8	1.2	0.6
Aug	$22.67	1.8	1.1	0.7
2011
Jan	$22.86	1.9	1.6	0.3
Feb	$22.88	1.8	2.1	-0.3
Mar	$22.89	1.8	2.7	-0.9
Apr	$22.93	1.8	3.2	-1.4
May	$23.02	1.9	3.6	-1.6
Jun	$23.01	1.9	3.6	-1.6
Jul	$23.12	2.3	3.6	-1.3
Aug	$23.08	1.8	3.8	-1.9
Sep	$23.12	1.9

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

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

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

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

Average hourly earnings of all US employees in the US in constant dollars of 1982-1984 from the dataset of the US Bureau of Labor Statistics (BLS) are provided in Table 10. Average hourly earnings fell 1.9 percent after adjusting for inflation in the 12 months ending in Aug 2011. Table 10 confirms the trend of deterioration of purchasing power of average hourly earnings in 2011. Those who still work bring back home a paycheck that buys fewer goods than a year earlier.

Table 10, US, Average Hourly Earnings of All Employees 1982-1984 Dollars

Year	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug
2006			10.04	10.04	10.00	10.02	10.00	9.97
2007	10.13	10.12	10.12	10.12	10.10	10.14	10.13	10.13
2008	10.02	10.01	10.03	10.01	10.00	9.95	9.88	9.93
2009	10.39	10.37	10.39	10.40	10.39	10.34	10.34	10.33
2010	10.32	10.33	10.33	10.35	10.39	10.41	10.39	10.40
2011	10.34	10.29	10.24	10.22	10.24	10.26	10.26	10.20
∆% 20011 /2010	0.2	0.6	-0.8	-1.3	-1.4	-1.4	-1.3	-1.9

Source: Bureau of Labor Statistics

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

The deterioration of purchasing power of the average hourly earnings of US workers is shown by Chart 11 of the US Bureau of Labor Statistics. Chart 11 plots average hourly earnings of all US employees in constant 1982-1984 dollars with evident decline from 2010 to 2011.

Chart 11, US, Average Hourly Earnings of All Employees 1982-1984 Dollars

Source: Bureau of Labor Statistics http://www.bls.gov/data/

III World Financial Turbulence. The past three months have been characterized by financial turbulence, attaining unusual magnitude in the past month. Table 11, updated with every comment in this blog, provides beginning values on Oct 3 and daily values throughout the week ending on Fr Oct 7 of several financial assets. Section VI Valuation of Risk Financial Assets provides a set of more complete values. All data are for New York time at 5 PM. The first column provides the value on Fri Sep 30 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 1.3392/EUR in the first row, first column in the block for currencies in Table 15 for Fri Oct 3, appreciating to USD 1.3185/EUR on Mon Oct 3, or by 1.5 percent. Table 11 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 11 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 1.3185/EUR on Oct 3; the second row provides the cumulative percentage appreciation or depreciation of the exchange rate from the rate on the last business day of the prior week, in this case Fri Sep 30, to the last business day of the current week, in this case Fri Oct 7, such as appreciation of 0.1 percent for the dollar to USD 1.338/EUR by Oct 7; and the third row provides the percentage change from the prior business day to the current business day. For example, the USD appreciated (negative sign) by 0.1 percent from the rate of USD 1.3392/EUR on Fri Sep 30 to the rate of USD 1.338/EUR on Fri Oct 7 {[1.338/1.3392 – 1]100 = -0.1%} and appreciated by 0.4 percent from the rate of USD 1.344 on Thu Oct 6 to USD 1.338/EUR on Fri Oct 7 {[1.338/1.344 -1]100 = -0.4%}. The dollar appreciated during the week because fewer dollars, $1.338, were required to buy one euro on Fri Oct 7 than $1.3392 required to buy one euro on Fri Sep 30. The appreciation of the dollar in the week was caused by risk aversion with risk financial investments being sold in exchange for dollar-denominated assets.

Table 11, Weekly Financial Risk Assets Oct 3 to Oct 7, 2011

Sep 30, 2011

M 3

Tu 4

W 5

Th 6

Fr 7

USD/
EUR

1.3392

0.8%

1.3185

1.5%

1.3346

0.3%

-1.2%

1.3345

0.3%

0.0%

1.344

-0.4%

-0.7%

1.338

0.1%

0.4%

JPY/
USD

77.04

-0.6%

76.6455

0.5%

76.901

0.2%

-0.3%

76.7795

0.3%

0.1%

76.711

0.4%

0.1%

76.709

0.4%

0.0%

CHF/
USD

0.908

-0.9%

0.9204

-1.4%

0.9178

-1.1%

0.3%

0.9231

-1.7%

-0.6%

0.92

-1.3%

0.3%

0.915

-0.8%

0.5%

CHF/EUR
1.2143

0.7%

1.2135

-0.1%

1.2249

-0.9%

1.2319

-1.4%

-0.6%

1.2369

-1.9%

-0.4%

1.2420

-2.3%

-0.4%

USD/
AUD

0.966

1.0352

-1.2%

0.9537

1.0485

-1.3%

0.9581

1.0437

-0.8%

0.5%

0.9651

1.0362

-0.1%

0.7%

0.975

1.0256

0.9%

1.0%

0.977

1.0235

1.1%

0.2%

10 Year
T Note

1.912

1.755

1.833

1.884

1.995

2.078

2 Year T Note
0.248

0.228

0.248

0.252

0.268

0.292

German Bond

2Y 0.55

10Y 1.89

2Y 0.50 10Y 1.82

2Y 0.46 10Y 1.73

2Y 0.50 10Y 1.84

2Y 0.61 10Y 1.94

2Y 0.60 10Y 2.00

DJIA

10913.38

1.3%

-2.4%

-0.9%

1.4%

0.2%

1.2%

1.9%

1.7%

-0.2%

DJ Global

1725.68

1.5%

-2.9%

-3.3%

-0.4%

-1.3%

2.1%

1.5%

2.8%

1.8%

0.3%

DJ Asia Pacific

1164.97

0.9%

-2.5%

-4.5%

-2.1%

-4.9%

-0.4%

-2.2%

2.8%

-0.4%

1.9%

Nikkei
8700.29

1.6%

-1.8%

-2.8%

-1.1%

-3.6%

-0.9%

-2.0%

1.7%

-1.1%

0.9%

Shanghai

2359.22

-3.0%

DAX
5502.02

5.9%

-2.3%

-5.2%

-2.9%

-0.5%

4.9%

2.6%

3.2%

0.5%

DJ UBS Comm.

140.2

-2.0

140.30

0.1%

138.35

-1.3%

-1.4%

140.4

0.1%

1.5%

142.79

1.8%

1.7%

141.8

1.1%

-0.7%

WTI $ B
78.67

-1.9%

76.65

-2.6%

77.59

-1.4

-1.2%

79.76

1.4%

2.8%

82.27

4.6%

3.1%

82.98

5.5%

0.9%

Brent $/B

102.28

-1.6%

100.93

-1.3%

101.55

-0.7%

0.6%

102.73

0.4%

1.2%

104.95

2.6%

2.2%

106.02

3.6%

1.0%

Gold $/OZ

1622.4

-0.2%

1655.0

2.0%

1621.0

-0.1%

-2.1%

1642.2

1.2%

1.3%

1628.1

0.3%

-0.9%

1640.6

1.1%

0.8%

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

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

Source:

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

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

There was again turbulence in financial assets with flight from risk exposures to safe havens and return to risk financial assets during the week of Oct 7. Risk aversion is present in the appreciation of the USD by 0.1 percent and the continuing strength of the Japanese yen that appreciated 0.4 percent in the week. 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) prevented flight of capital into the Swiss franc that depreciated 2.3 percent relative to the euro and 0.8 percent relative to the dollar. Another symptom of risk aversion is the depreciation of the Australian dollar by 1.3 percent in unwinding carry trades on Mon Oct 3 but appreciation by 1.1 percent by Fri Oct 7. .

Risk aversion is also captured by decline of the yield of the 10-year Treasury note to 1.912 percent on Sep 30, increasing to 2.078 percent by Fri Oct 7 but still at a level well below consumer price inflation of 3.8 percent in the 12 months ending in Aug (http://www.bls.gov/cpi/). Investors are willing to sacrifice yield relative to inflation in defensive actions to avoid turbulence in valuations of risk financial assets. 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 on Fri Oct 7 at 0.60 percent for the two-year maturity and 2.00 percent for the 10-year maturity while the flash euro zone CPI inflation for Sep is at 3.0 percent (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-30092011-AP/EN/2-30092011-AP-EN.PDF). Safety overrides inflation-adjusted yield.

There were gains in equity indexes in Europe and the US in Table 11 in the week of Fri Oct 7. The Dow Asia Pacific dropped 0.4 percent and the Nikkei Average fell 0.9 percent in the week even after solid increases on Oct 7. The gains in Oct 6 and Oct 7 were driven by optimism of a solution to the European sovereign risk dilemma by means of recapitalization of banks.

Commodities roughly tracked other risk financial assets. All three indexes commodity prices in Table 11 rose in the week of Oct 7 and the DJ UBS Commodity Index rose 1.1 percent in the week. In the absence of risk aversion, risk financial assets tend to increase in value because of the carry trade from zero interest rates. Exposures are reduced because of risk aversion, causing collapse of valuations of risk financial assets.

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 V World Economic Slowdown. Data and analysis are provided for regions and countries that jointly account for about three quarters of world output.

The issue of rescuing sovereigns in difficulty is increasingly becoming the issue of survival of the euro. Cochrane (2011Sep28), writing in the Wall Street Journal on Sep 28, argues, contrary to official doctrine and rescue efforts, that survival of the euro requires allowing sovereigns to default and maintaining the European Central Bank (ECB) isolated from the defaults. The practical problem in the bailouts of sovereign is that the bailout fund has been approved for €440 billion while several trillion euro are required if there are difficulties with the larger sovereigns such as Italy and Spain. A proposal consists of leveraging by using the €440 billion to borrow the trillions of dollars of euro. Davies (2011Sep28) finds two options for the borrowing, both involving “other people’s money.” (1) The rescue fund would receive loans from the ECB; and (2) the rescue fund would receive loans from sovereign wealth funds of emerging markets with large reserves. Cochrane (2011Sep28) argues correctly, as it occurred with credit-risk transfer products, that the risk does not disappear but is just merely transferred. The risk would end up with the lenders such as the ECB and would deteriorate the reserves of emerging markets. Cochrane (2011Sep28) finds resemblance with the purchase of bonds before the financial crisis to increase leverage while writing CDS (credit default swaps). The ECB would find significant deterioration of its already high subprime collateral. Davies (2011Sep28) finds that the ECB would become a gigantic collateralized debt obligation (CDO). The bailout fund would issue notes for the more than one trillion euro required in the bailout that would be insured by the €440 billion, increasing the possibility of raising the loans because of the AAA rating of a few core sovereigns, in particular, Germany. The trillions of euro loans from the ECB or emerging markets could be used to acquire subprime sovereign debt and recapitalize European banks that also own some of that debt. The credit risk would be transferred almost entirely to Germany and its taxpayers who effectively guarantee the loans. Germany would be faced with the same issue as unsustainable reparations from World War II only in that in this case Germany did not provoke a war (see the classic treatment by Keynes (1929, 1929R and Ohlin 1929; see also Samuelson 1952, Johnson 1975, Darity and Frank 2003 and Lane and Milessi-Ferretti 2004).

An important article published in the Financial Times (http://www.ft.com/intl/cms/s/0/04993d2a-ef6f-11e0-941e-00144feab49a.html#axzz1a01qPYQ3 ) on Oct 5 by several authors (Patrick Jenkins, Alex Barker, Peter Spiegel, Gerrit Wiesmann and Hugh Carnegy with additional work by George Parker and Joshua Chaffin) revealed discussion at a meeting of the European Banking Authority (EBA) (http://www.eba.europa.eu/). Provisions for major write downs of European sovereign debt could cause reduction of capital in European banks by €200 billion. The meeting discussed using market values in valuation of sovereign debt held by banks. The EBA would be discussing mechanisms for forcing banks to recapitalize in accordance with loss of value of sovereign debt holdings. One possibility would be the write down of Greece’s bonds. In another article published in the Financial Times (http://www.ft.com/intl/cms/s/0/573452fe-f0ff-11e0-b56f-00144feab49a.html#axzz1aHrBA6Tq) on Oct 8, on “Merkel and Sarkozy hold talks on crisis,” Quentin Peel and Hugh Carnegy analyze talks on Oct 9 by the heads of state of Germany and France, Angela Merkel and Nicolas Sarkozy, on the financial crisis in the euro zone and how to finance the probable recapitalization of banks because of losses in holdings of sovereign debt. Quentin Peel, writing on Oct 9 on “Merkel and Sarkozy set euro deadline,” published in the Financial Times (http://www.ft.com/intl/cms/s/0/c3beacac-f29a-11e0-931e-00144feab49a.html#axzz1aHrBA6Tq) informs that France and Germany have set a deadline before the meeting of European leaders at the end of Oct to solve the euro zone financial crisis, including bank recapitalization. There no details on bank recapitalization that faces tough political opposition.

Rating agencies have been quite active in downgrades of European sovereign risks. On Oct 4, Moody’s Investors Services (2011Oct4IGB) downgraded the ratings of Italy’s government bonds to A2 with negative outlook from Aa2 but affirmed the Prime-1 rating of short-term debt. The reasons for the downgrade were: (1) risks of long-term funding of European sovereigns; (2) risks of weak economic growth because of internal slow growth and also global weakening growth; and (3) risks of implementation of government fiscal consolidation. On Oct 7, Moody’s Investor Services (2011Oct7) placed Belgium’s Aa1 ratings on local and foreign government bonds on review for “possible downgrade, while affirming its short-term ratings at Prime-1.” The reasons for the review of ratings are: (1) weakness in long-term sovereign funding markets; (2) risks of government debt in a weak growth environment; and (3) impact of bank support measures on the already weak government balance sheets. On Oct 7, Fitch Ratings (2011Oct7) downgraded the long-term rating of Spain foreign and local debt from ‘AA+’ to ‘AA-‘ and affirmed negative rating outlook. Spain’s short-term rating was affirmed at ‘F1+.’ The reason for the downgrade is a combination of deepening euro area financial crisis, regional budget weakness and doubts on medium term growth of Spain. Fitch Ratings also downgraded Italy long-term foreign and local currency debt from ‘AA-‘to ‘A+’ and maintained the outlook as negative. In an article published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970203388804576616772677159568.html?mod=WSJ_hp_LEFTWhatsNewsCollection) on Oct 8 on “Spain and Italy hit by downgrades,” Stephen Fidler, William Horobin and Matthew Dalton analyze the downgrades and relate them to the discussion on bank recapitalization. The meeting in Berlin of prime ministers Angela Merkel and Nicolas Sarkozy on Oct 9 and the summit of European leaders on Oct 17 and 18 may develop a hierarchy on how to proceed with bank recapitalization.

The Wriston “doctrine” on sovereign lending was predicated on the argument that countries do not bankrupt (Wriston 1982). Another Wriston idea was that the old Citibank should be more valuable dead than alive: if Citibank followed the model of the old Merrill Lynch and sold the individual components or franchises the value would be higher than that of the unbroken Citibank. There was a rise in leveraged buy outs (LBO) in the 1980s that has been extensively analyzed in academic literature (see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 159-66). The debt crisis of the 1980s and many other episodes in history actually proved that a country can bankrupt and that many countries can bankrupt simultaneously.

Welfare economics considers the desirability of alternative states, which in this case would be evaluating the “value” of Germany (1) within and (2) outside the euro zone. Is the sum of the wealth of euro zone countries outside of the euro zone higher than the wealth of these countries maintaining the euro zone? On the choice of indicator of welfare, Hicks (1975, 324) argues:

“Partly as a result of the Keynesian revolution, but more (perhaps) because of statistical labours that were initially quite independent of it, the Social Product has now come right back into its old place. Modern economics—especially modern applied economics—is centered upon the Social Product, the Wealth of Nations, as it was in the days of Smith and Ricardo, but as it was not in the time that came between. So if modern theory is to be effective, if it is to deal with the questions which we in our time want to have answered, the size and growth of the Social Product are among the chief things with which it must concern itself. It is of course the objective Social Product on which attention must be fixed. We have indexes of production; we do not have—it is clear we cannot have—an Index of Welfare.”

If the burden of the debt of the euro zone falls on Germany and France or only on Germany, is the wealth of Germany and France or only Germany higher after breakup of the euro zone or if maintaining the euro zone? In practice, political realities will determine the decision through elections.

The euro zone faces a critical survival risk because several of its members may default on their sovereign obligations if not bailed out by a few of the other members. Contrary to the Wriston doctrine, investing in sovereign obligations is a credit decision. The value of a bond today is equal to the discounted value of future obligations of interest and principal until maturity. On Oct 7, the yield of the 2-year bond of the government of Greece was quoted above 56 percent and the 10-year bond yield traded at over 24 percent. In contrast, the 2-year US Treasury note traded at 0.292 percent and the 10-year at 2.078 percent while the comparable 2-year government bond of Germany traded at 0.60 percent and the 10-year government bond of Germany traded at 2.0 percent (see Table 11). There is no need for sovereign ratings: the perceptions of investors are of relatively higher probability of default by Greece, defying Wriston (1982), and nil probability of default of the US Treasury and the German government. The essence of the sovereign credit decision is whether the sovereign will be able to finance new debt and refinance existing debt without interrupting service of interest and principal. Prices of sovereign bonds incorporate multiple anticipations such as inflation and liquidity premiums of long-term relative to short-term debt but also risk premiums on whether the sovereign’s debt can be managed as it increases without bound or close to the maximum desired by investors.

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

The prospects of survival of the euro zone are dire. Table 12 is constructed with IMF World Economic Outlook database released during the prior week for GDP in USD billions, primary net lending/borrowing as percent of GDP and general government debt as percent of GDP for selected regions and countries in 2010.

Table 12, World and Selected Regional and Country GDP and Fiscal Situation

	GDP 2010 USD Billions	Primary Net Lending Borrowing % GDP 2010	General Government Net Debt % GDP 2010
World	62,911.2
Euro Zone	12,167.8	-3.6	65.9
Portugal	229.2	-6.3	88.7
Ireland	206.9	-28.9	78.0
Greece	305.4	-4.9	142.8
Spain	1,409.9	-7.8	48.8
Major Advanced Economies G7	31,716.9	-6.5	76.5
United States	14,526.6	-8.4	68.3
UK	2,250.2	-7.7	67.7
Germany	3,286.5	-1.2	57.6
France	2,562.7	-4.9	76.5
Japan	5,458.8	-8.1	117.2
Canada	1,577.0	-4.9	32.2
Italy	2,055.1	-0.3	99.4
China	5,878.3	-2.3	33.8*
Cyprus	23.2	-5.3	61.6

*Gross Debt

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

The data in Table 12 are used for some very simple calculations in Table 13. The column “Net Debt USD Billions” in Table 13 is generated by applying the percentage in Table 12 column “General Government Net Debt % GDP 2010” to the column “GDP USD Billions.” The total debt of France and Germany in 2010 is $3853.5 billion, as shown in row “B+C” in column “Net Debt USD Billions” The sum of the debt of Italy, Spain, Portugal, Greece and Ireland is $3531.6 billion. There is some simple “unpleasant bond arithmetic” in the two final columns of Table 12. Suppose the entire debt burdens of the five countries with probability of default were to be guaranteed by France and Germany, which de facto would be required by continuing the euro zone. The sum of the total debt of these five countries and the debt of France and Germany is shown in column “Debt as % of Germany plus France GDP” to reach $7385.1 billion, which would be equivalent to 126.3 percent of their combined GDP in 2010. Under this arrangement the entire debt of the euro zone including debt of France and Germany would not have nil probability of default. The final column provides “Debt as % of Germany GDP” that would exceed 224 percent if including debt of France and 165 percent of German GDP if excluding French debt. The unpleasant bond arithmetic illustrates that there is a limit as to how far Germany and France can go in bailing out the countries with unsustainable sovereign debt without incurring severe pains of their own such as downgrades of their sovereign credit ratings. A central bank is not typically engaged in direct credit because of remembrance of inflation and abuse in the past. There is also a limit to operations of the European Central Bank in doubtful credit obligations. Wriston (1982) would prove to be wrong again that countries do not bankrupt but would have a consolation prize that similar to LBOs the sum of the individual values of euro zone members outside the current agreement exceeds the value of the whole. Internal rescues of French and German banks may be less costly than bailing out other euro zone countries so that they do not default on French and German banks.

Table 13, Guarantees of Debt of Sovereigns in Euro Area as Percent of GDP of Germany and France, USD Billions and %

	Net Debt USD Billions	Debt as % of Germany Plus France GDP	Debt as % of Germany GDP
A Euro Area	8,018.6
B Germany	1,893.0		$7385.1 as % of $3286.5 =224.7% $5424.6 as % of $3286.5 =165.1%
C France	1,960.5
B+C	3,853.5	GDP $5849.2 Total Debt $7385.1 Debt/GDP: 126.3%
D Italy	2,042.8
E Spain	688.0
F Portugal	203.3
G Greece	436.1
H Ireland	161.4
Subtotal D+E+F+G+H	3,531.6

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

IV Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table 14 updated with every post, provides the latest annual data for GDP, consumer price index (CPI) inflation, producer price index (PPI) inflation and unemployment (UNE) for the advanced economies, China and the highly-indebted European countries with sovereign risk issues. The table now includes the Netherlands and Finland that with Germany make up the set of northern countries in the euro zone that hold key votes in the enhancement of the mechanism for solution of the sovereign risk issues (http://www.ft.com/cms/s/0/55eaf350-4a8b-11e0-82ab-00144feab49a.html#axzz1G67TzFqs). Newly available data on inflation is considered below in this section. The data in Table 14 for the euro zone and its members is updated from information provided by Eurostat but individual country information is provided in this section as soon as available, following Table 14. Data for other countries in Table 14 is also updated with reports from their statistical agencies. Economic data for major regions and countries is considered in Section V World Economic Slowdown following individual country and regional data tables.

Table 14, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates

	GDP	CPI	PPI	UNE
US	2.9	3.8	6.5	9.1
Japan	-1.1	0.2	2.6	4.4
China	9.6	6.2	7.3
UK	1.8	4.5* RPI 5.2	6.3* output 17.5* input 13.3**	7.7
Euro Zone	1.6	3.0	5.9	10.0
Germany	2.8	2.5	5.4	6.0
France	1.6	2.4	6.3	9.9
Nether-lands	1.5	2.8	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	2.8	5.5	12.3
Ireland	-1.0	1.0	4.7	14.6
Italy	0.8	2.3	4.8	7.9
Greece	-4.8	1.4	7.4	15.1
Spain	0.7	2.7	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.statistics.gov.uk/pdfdir/cpi0611.pdf

** Excluding food, beverage, tobacco and petroleum

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

Table 15 provides the forecasts of the Federal Reserve Board Members and Federal Reserve Bank Presidents for the FOMC meeting in Jun. There are lags in effect of monetary policy (Batini and Nelson 2002, Culbertson 1960, 1961, Friedman 1961, Romer and Romer 2004). Central banks forecast inflation in the effort to program monetary policy to attain effects at the correct timing of need by taking into account lags in effects of policy (Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 99-116). Inflation by the price index of personal consumption expenditures (PCE) was forecast for 2011 in the Apr meeting of the FOMC between 2.1 to 2.8 percent. Table 12 shows that the interval has narrowed to PCE (personal consumption expenditures) headline inflation of between 2.3 and 2.5 percent. The FOMC focuses on core PCE inflation, which excludes food and energy. The Apr forecast of core PCE inflation was an interval between 1.3 and 1.6 percent. Table 15 shows the revision of this forecast in Jun to a higher interval between 1.5 and 1.8 percent. A new forecast with significant changes will be provided in Nov.

Table 15, Forecasts of PCE Inflation and Core PCE Inflation by the FOMC, %

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

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

In testimony to the Joint Economic Committee of the US Congress, Chairman Bernanke (2011Oct4, 6) provides more current evaluation of the inflation outlook:

“As the FOMC anticipated, however, inflation has begun to moderate as these transitory influences wane. In particular, the prices of oil and many other commodities have either leveled off or have come down from their highs, and the step-up in automobile production has started to reduce pressures on the prices of cars and light trucks. Importantly, the higher rate of inflation experienced so far this year does not appear to have become ingrained in the economy. Longer-term inflation expectations have remained stable according to surveys of households and economic forecasters, and the five-year-forward measure of inflation compensation derived from yields on nominal and inflation-protected Treasury securities suggests that inflation expectations among investors may have moved lower recently. In addition to the stability of longer-term inflation expectations, the substantial amount of resource slack in U.S. labor and product markets should continue to restrain inflationary pressures.”

The measures taken by the Federal Open Market Committee (FOMC) are described by Chairman Bernanke (2011Oct4, 6-7) as follows:

“In view of the deterioration in the economic outlook over the summer and the subdued inflation picture over the medium run, the FOMC has taken several steps recently to provide additional policy accommodation. At the August meeting, the Committee provided greater clarity about its outlook for the level of short-term interest rates by noting that economic conditions were likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. And at our meeting in September, the Committee announced that it intends to increase the average maturity of the securities in the Federal Reserve’s portfolio. Specifically, it intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less, leaving the size of our balance sheet approximately unchanged. This maturity extension program should put downward pressure on longer-term interest rates and help make broader financial conditions more supportive of economic growth than they would otherwise have been. The Committee also announced in September that it will begin reinvesting principal payments on its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities rather than in longer-term Treasury securities. By helping to support mortgage markets, this action too should contribute to a stronger economic recovery.”

Three distinguished economists have analyzed current monetary policy from different perspectives. These contributions are considered in turn.

First, Professor Alan S. Blinder (2011Sep28) of Princeton University, former Vice Chairman of the Board of Governors of the Federal Reserve System, writing on “Ben Bernanke deserves a break,” on Sep 28, 2011, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204422404576594682273860392.html?mod=WSJ_hps_sections_opinion), analyzes the need and possible effects of “let’s twist again” monetary policy: (1) weak US economic growth is insufficient to reduce high unemployment; (2) political division prevents further fiscal stimulus; (3) financial markets anticipated “let’s twist again” monetary policy and could downtrend in the absence of any measure; and (4) with policy interest rates mear zero there are not many additional tools of monetary policy. Blinder (2011Sep28) finds that policy action was needed. The first round of quantitative easing attempted to reduce the spread between Treasury securities and mortgage-backed securities with the objective of stimulating the real estate sector. An added advantage of “let’s twist again” is that it provides for the reinvestment of principal and interest of the Fed’s portfolio of mortgage-backed securities into mortgage-backed securities and not in Treasury securities. Blinder (2011Sep28) also ponders if future quantitative easing could focus on corporate bonds, syndicated loans, consumer receivables and similar private-sector instruments.

Second, Professor Charles I. Plosser (2011Sep29), currently President and CEO of the Federal Reserve Bank of Philadelphia, analyzes the economic outlook and the reasons for his dissenting votes in two successive meetings of the Federal Open Market Committee (FOMC). An important constraint of policy is that deflation was a risk when quantitative easing two was deliberated and implemented on Nov 3, 2010. The environment of inflation has changed according to Plosser (2011Sep29, 5):

“Thus, with inflation higher and unemployment lower, it is appropriate to ask what criteria we are using to justify further accommodation. In this environment, I think it is very important that we refrain from actions that risk fueling a steady rise in inflation or inflation expectations over the medium term. We must not become too sanguine that high unemployment will lead to low inflation. The lesson of the 1970s is clear – high unemployment or low resource utilization is not sufficient to prevent high rates of inflation. The current environment in the U.K. should also be a warning. The unemployment rate in Britain is near 8 percent, having risen sharply during its recession, yet inflation is now approaching 5 percent and has been steadily rising for nearly two years.”

Monetary policy, according to Plosser (2011Sep29, 6) should be decided on the basis of cost and benefit analysis and not merely on just doing something. Quantitative easing two and the original Operation Twist reduced yields of long-term Treasury securities by 20 basis points or less. The problem is that “the pass-through to the rates at which consumers and businesses actually borrow is likely to be much less” (Plosser 2011Sep29, 6). Unconventional policies in high doses may also have high potential costs as analyzed by Plosser (2011Sep29, 6):

“We have provided a great deal of monetary accommodation to the economy, and given the stubbornness of the unemployment rate in responding to these efforts, we should be cautious and vigilant that our previous accommodative policies do not translate into a steady rise in inflation over the medium term even while the unemployment rate remains elevated. Creating an environment of stagflation, reminiscent of the 1970s, will not help businesses, the unemployed, or the consumer. It is an outcome we must carefully guard against.”

Third, Professor Ronald McKinnon (2011Sep30) of Stanford University, writing on “Where are the bond vigilantes?” on Sep 30, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424053111904332804576538363789127084.html?mod=WSJ_hps_sections_opinion), analyzes how unconventional monetary policy has removed fiscal discipline imposed by Treasury bond yields while also disrupting the functioning of financial markets. In historical episodes of proposed high fiscal deficits, bond yields surged in anticipation of unsustainable debt that helped to elicit agreements among politicians to control deficits and debt. McKinnon (2011Sep30) finds two conditions for “bond vigilantes” to impose fiscal discipline by increases in Treasury yields. (1) Treasury securities must be held by institutions that are sensitive to changes in yields, meaning that they worry about future inflation and risk premiums on government debt resulting from uncontrolled fiscal deficits. (2) Private holders of Treasury securities must have expectations that decreases in short-term interest rates toward zero are only temporary, meaning that the FOMC is not committed to maintaining interest rates at zero forever. Long-term interest rates are viewed as expected future short-term interest rates plus the liquidity premium required in holding securities with higher duration. These two conditions have disappeared. (1) Near zero interest rates during almost all of the past decade or the threat of such rates as policy is dominated by unconventional monetary policy has caused a global hunt for yields that bloated assets in emerging markets. As a result of hot money capital flows, foreign monetary authorities are major holders of Treasury securities and are less concerned about yields. (2) The various rounds of quantitative easing have converted the Fed in holder of large part of Treasury debt and the Fed is yield conscious in the opposite direction of near zero interest rates.

McKinnon (2011Sep30) considers three adverse effects of unconventional monetary policy besides eroding imposition of fiscal discipline by rising bond yields in the presence of uncontrolled deficits and unsustainable debt. (1) In past monetary policy, borrowers believed temporarily short-term interest rates would be eventually reversed such that they took advantage of low borrowing costs. This is no longer true as the FOMC decided on Aug 9, 2011, to leave fed fund rates at 0 to ¼ percent for years in advance (http://www.federalreserve.gov/newsevents/press/monetary/20110809a.htm): “The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.” Why borrow to invest or consume now when rates are going to be almost zero indefinitely? (2) Quantitative easing is financed by creating bank reserves that banks prefer to leave deposited at the Federal Reserve System remunerated at 0.25 percent but without risk instead of lending them at near zero interest rates with risk in the interbank market. (3) Maintaining short-term interest rates creates major disruptions of many financial institutions such as pension funds. McKinnon (2011Sep30) provides the example of calculations by pension actuaries that California pension funds require a yield of 7.5 percent to break even in honoring their annuities. A review of arguments of Professor McKinnon is in http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html

Unconventional monetary policy of near zero interest rates and quantitative easing has been successful mainly in promoting the carry trade from near zero interest rates to leveraged positions in risk financial assets, in particular commodity futures. Chart 12 of the Food and Agriculture Organization (FAO) shows the Food Price Index that trended down during the recession of 2001. An upward trend was promoted by unconventional monetary policy of 1 percent fed funds rate together with the suspension of the auction of the 30-year Treasury bond to lower mortgage rates, encouraging refinancing that was more important in cash infusion of households than tax rebates. Food prices trended upward and with sharp reductions of monetary policy rates peaked in a big jump to more than $140/barrel in 2008 during a global recession. The flight out of risk financial assets after the announcement of the Troubled Asset Relief Program (TARP) (see Cochrane and Zingales 2009) is shown in Chart 1 in a collapse of the Food Price Index of FAO. With zero interest rates after the FOMC meeting on Dec 16, 2008 (http://www.federalreserve.gov/newsevents/press/monetary/20081216b.htm) and realization in early 2009 that bank assets were not as worrisome as argued for approval of TARP, food prices jumped again to even higher levels.

Chart 12, Food and Agriculture Organization Food Price Index 1990-2011

Source: http://www.fao.org/worldfoodsituation/wfs-home/foodpricesindex/en/

Chart 13 of the US Energy Information Administration shows exactly the same behavior of the price of crude oil. There is the same decline after the 2001 recession that was confused as global deflation. Oil prices trend upward with the near zero interest rates and suspension of the auction of the 30-year Treasury, which was quantitative easing by reduction of supply in a desired segment of the yield curve. There is the same jump of oil prices in 2008 in the midst of sharp global contraction and vertical drop in the flight to safety away from risk financial assets. A new upward trend was promoted by the carry trade from zero interest rates after Dec 16, 2008 (http://www.federalreserve.gov/newsevents/press/monetary/20081216b.htm) and the return of risk appetite in early 2009. Prices have dropped recently because of risk aversion resulting from the European sovereign risk crisis and growth slowdown in the US and the world. The success of unconventional monetary policy of zero interest rates and quantitative easing is in promoting carry trades from zero interest rates into risk financial assets such as equities, emerging markets, currencies and commodities’ futures.

Chart 13, Crude Oil Cushing, OK, Contract 1

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

The producer price index of the euro zone fell 0.1 percent in Aug relative to Jul, as shown in Table 16. Producer price inflation has moderated since May but there was another spike of 1.5 percent of energy prices in Jul followed by decline of 0.7 percent in Aug.

Table 16, Euro Zone, Industrial Producer Prices Month ∆%

	Aug 2011	Jul 2011	Jun 2011	May 2011
Industry ex Construction	-0.1	0.5	0.0	-0.2
Industry ex Construction & Energy	01	0.1	0.1	0.2
Intermediate Goods	0.0	0.0	0.0	0.2
Energy	-0.7	1.5	-0.3	-1.1
Capital Goods	0.2	0.1	0.3	0.0
Durable Consumer Goods	0.2	0.1	0.0	0.1
Nondurable Consumer Goods	0.2	0.1	0.1	0.3

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

Although moderating in recent months, 12 months rate of increase of producer prices in the euro zone continue at relatively high levels, as shown in Table 17. In Aug, producer prices rose 5.9 percent relative to a year earlier. Industrial prices excluding construction and energy rose 3.9 percent in the 12 months ending in Aug while energy prices rose 11.5 percent.

Table 17, Euro Zone, Industrial Producer Prices 12 Months ∆%

	Aug 2011	Jul 2011	Jun 2011	May 2011
Industry ex Construction	5.9	6.1	5.9	6.2
Industry ex Construction & Energy	3.9	4.1	4.1	4.2
Intermediate Goods	5.7	6.1	6.3	6.6
Energy	11.5	11.9	10.7	11.8
Capital Goods	1.6	1.6	1.4	1.2
Durable Consumer Goods	2.0	1.9	1.8	1.9
Nondurable Consumer Goods	3.5	3.5	3.7	3.8

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

Inflation in the UK is somewhat higher than in many advanced economies, deserving more detailed analysis. Table 18 provides 12 months rate of change of UK output prices for all manufactured products, excluding food, beverage and petroleum and excluding duty. The 12 months rates rose significantly in 2011 in all three categories, reaching 6.3 percent for all manufactured products in Sep 2011. Output price inflation is highly sensitive to commodity prices as shown by the increase by 6.7 percent in 2008 when oil prices rose over $140/barrel even in the midst of a global recession under the carry trade from zero interest rates. The mirage episode of deflation in 2001 and 2002 is also captured by the output prices for the UK, which was originated in decline of commodity prices but was used as an argument for the unconventional monetary policy of zero interest rates and quantitative easing during the past decade.

Table 18, UK Output Prices 12 Months ∆% NSA

	All Manufac -tured Products	Excluding Food, Beverage and Petroleum	All Excluding Duty
Sep 2011	6.3	3.8	0.2
Aug	6.0	3.6	6.2
Jul	6.1	3.4	6.2
Jun	5.8	3.2	5.9
May	5.4	3.4	5.5
Apr	5.6	3.6	5.8
Mar	5.6	3.1	5.5
Feb	5.3	3.1	5.2
Jan	5.0	3.3	5.0
Dec 2010	4.2	2.7	4.0
Year ∆%		Ex Food
2010	4.2	3.0	3.9
2009	1.6	2.5	0.9
2008	6.7	3.7	6.7
2007	2.3	1.4	2.1
2006	2.0	1.5	2.0
2005	1.9	1.0	1.9
2004	1.0	-0.3	0.6
2003	0.6	0.1	0.5
2002	-0.1	-0.4	-0.3
2001	-0.3	-0.6	-1.1
2000	1.4	-0.5	0.8
1999	0.6	-0.9	-0.3

Source:

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

http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/september-2011/index.html

Chart 14 of the UK Office for National Statistics shows the acceleration of output prices of materials and fuels purchased during the commodity price shock from 2010 into 2011. Output prices excluding foods, beverages and petroleum products rose with a lag.

Chart 14, UK, Output Prices 12 Months ∆% NSA

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/september-2011/sum-producer-price-index---september-2011.html

Monthly data and annual equivalent rates of output prices are shown in Table 19. There has been significant deceleration of output price inflation from an annual equivalent rate of 16.3 percent in Jan-Apr to 2.4 percent annual equivalent in May-Sep. As in the euro zone producer price index, there was monthly inflation in all three measurements of UK’s output prices. An important characteristic is that output prices excluding food, beverage and petroleum decelerated from an annual equivalent rate of change of 4.6 percent in Jan-Sep to 3.2 percent in May-Sep. Another important characteristic is that prices in all three measurements rose in each and every month 2011 with the exception of the decline by 0.2 percent in Mar for the index excluding duty.

Table 19, UK Output Prices Month ∆% NSA

	All Manufac -tured Products	Excluding Food, Beverage and Petroleum	All Excluding Duty
Sep 2011	0.3	0.3	0.2
Aug	0.0	0.2	0.1
Jul	0.3	0.4	0.3
Jun	0.2	0.2	0.2
May	0.2	0.2	0.2
May-Sep ∆% AE	2.4	3.2	2.4
Apr	1.1	0.8	0.9
Mar	1.1	0.5	-0.2
Feb	0.5	0.0	0.5
Jan	1.1	0.8	1.1
Jan-Apr ∆% AE	16.3	8.7	9.6
Jan-Sep ∆% AE	6.6	4.6	4.5
Dec 2010	0.5	0.0	0.6

Source: http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/september-2011/tsd-producer-price-index---august-2011.html

Input prices in the UK have been more dynamic than output prices, as shown by Table 20. The 12 months rates of increase of input prices, even excluding food, tobacco, beverages and petroleum, are very high, reaching 17.5 percent in Sep 2011 for materials and fuels purchased and 13.3 percent excluding food, beverages and petroleum. There is only comparable experience with 22.2 percent inflation of materials and fuels purchased in 2008 and 16.9 percent excluding food, beverages and petroleum. UK input and output inflation is sensitive to commodity price increases. The mirage of deflation is also observed in input prices in 1999 and then again from 2001 to 2002.

Table 20, UK Input Prices 12 Months ∆% NSA

	Materials and Fuels Purchased	Excluding Food, Tobacco, Beverages and Petroleum
Sep 2011	17.5	13.3
Aug	16.2	13.0
Jul	18.2	13.3
Jun	16.8	12.6
May	16.2	11.4
Apr	17.9	12.2
Mar	14.8	10.3
Feb	14.9	10.7
Jan	14.2	10.5
Dec 2010	13.1	9.0
Year ∆%
2010	9.9	5.7
2009	-3.8	1.6
2008	22.2	16.9
2007	2.9	2.3
2006	9.8	7.3
2005	10.9	6.9
2004	3.3	1.6
2003	1.2	-0.6
2002	-4.4	-4.8
2001	-1.2	-1.2
2000	7.4	3.7
1999	-1.3	-3.6

Source:

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

http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/september-2011/index.html

Chart 15 of the UK Office for National Statistics shows input prices of materials and fuels purchased and excluding food, beverage, tobacco and petroleum products. There is persistent inflation of input prices in the UK on an evident upward trend.

Chart 15, UK, Input Prices 12 Months ∆%

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/september-2011/sum-producer-price-index---september-2011.html

The monthly rates of UK input price inflation in the UK are shown in Table 21. The rates are very high for the general index and for the index with exclusions. At the margin, inflation of materials and fuels purchased rose 1.7 percent in Sep and 0.8 percent with the exclusions.

Table 21, UK Input Prices Month ∆% NSA

	Materials and Fuels Purchased	Excluding Food, Tobacco, Beverages and Petroleum SA
Sep 2011	1.7	0.8
Aug	-1.8	0.4
Jul	0.4	0.8
Jun	0.1	0.9
May	-1.6	-0.1
Apr	2.8	1.9
Mar	3.8	1.2
Feb	1.4	1.2
Jan	2.3	1.4
Dec 2010	3.9	1.8

Source:

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

http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/september-2011/index.html

The UK Office for National Statistics also provides contributions in percentage points to the monthly and 12 months rates of inflation of manufactured products, shown in Table 22. Petroleum is the large contributor with 1.90 percentage points to the 12 months rate and 0.09 percentage points to the monthly rate in Sep. There are diversified sources of inflation such as 0.64 percentage points by clothing, textile & leather.

Table 22, UK, Contributions to Month and 12 Month Change in Prices of All Manufactured Products, Percentage Points

	12 Months % Points	Month % Points
Total %	6.3	0.2
Food Products	0.61	0.04
Tobacco & Alcohol	0.61	0.00
Clothing, Textile & Leather	0.64	0.04
Paper and Printing	0.20	0.01
Petroleum	1.90	0.09
Chemical & Pharmaceutical	0.60	0.01
Metal, Machinery & Equipment	0.13	0.01
Computer, Electrical & Optical	-0.04	0.05
Transport Equipment	0.18	0.02
Other Manufactured Products	0.63	0.03

Source:

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

http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/september-2011/index.html

Petroleum contributes more than one half, 9.74 percentage points, to the input price inflation in 12 months in Sep of 17.5 percent and 1.42 percentage points to the monthly rate of input inflation of 1.7 percent in Sep, as shown in Table 23. As in output inflation, there are contributions by many segments of the price index.

Table 23, Contributions to Month and 12 Month Change in Prices of Inputs, Percentage Points

	12 Months % Points	Month % Points
Total	17.5	1.7
Fuel	0.94	-0.02
Crude Oil	9.74	1.42
Domestic Food Materials	0.49	-0.09
Imported Food Materials	0.76	0.07
Other Domestic Produced Materials	0.20	0.00
Imported Metals	1.46	0.07
Imported Chemicals	1.17	0.02
Imported Parts and Equipment	1.38	-0.1
Other Imported Materials	1.37	0.06

Source:

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

http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/september-2011/index.html

V 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 a low 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 out 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.

VA 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.

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	Aug 12 months NSA ∆%: 3.8; ex food and energy ∆%: 2.0 Aug month ∆%: 0.4; ex food and energy ∆%: 0.2 Blog 09/18/11
Producer Price Index	Jun 12 months NSA ∆%: 6.5; ex food and energy ∆% 2.4 Aug month SA ∆% 0.2; ex food and energy∆%: 0.1 Blog 09/18/11
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	Aug month SA ∆%: 0.2 Aug 12 months NSA ∆%: 3.4 Capacity Utilization: 77.4 Blog 09/18/11
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 -7.72 Aug to Sep: –8.82 New Orders: From -7.82 Aug to –8.0 Blog 09/18/11
Philadelphia Fed Business Outlook Index	General Index from -30.7 Aug to -17.5 Sep New Orders from Aug -26.8 to -11.3 Sep Blog 09/18/11
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	Jul 11/Jul 10 NSA ∆%: Total Business 9.8; Manufacturers 11.8 Retailers 6.5; Merchant Wholesalers 10.8 Blog 09/18/11
Sales for Retail and Food Services	Aug 12 months ∆%: Retail and Food Services: 7.9; Retail ∆% 8.3 Blog 09/18/11
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	Aug Starts month SA ∆%: -5.0; Permits ∆%: 3.2 Jan/Jul 2011/2010 NSA ∆% Starts -3.8; Permits ∆% –2.8 Blog 09/25/11
Trade Balance	Balance Jul SA -$44,808 million versus Jun -$51,570 million Exports Jul SA ∆%: 3.6 Imports Jul SA ∆%: -0.2 Exports Jan-Jul 2011/2010 NSA ∆%: 18.1 Imports Jan-Jul 2011/2010 NSA ∆%: 17.5 Blog 09/11/11
Export and Import Prices	Aug 12 months NSA ∆%: Imports 13.0; Exports 9.6 Blog 09/18/11
Consumer Credit	Aug ∆% annual rate: 5 minus 4.6% Blog 10/09/11
Net Foreign Purchases of Long-term Treasury Securities	Jul Net Foreign Purchases of Long-term Treasury Securities: $9.5 billion Jul versus Jun $3.4 billion Major Holders of Treasury Securities: China $1173 billion; Japan $915 billion Blog 09/11/11
Treasury Budget	Fiscal Year to Aug 2011/2010 ∆%: Receipts 7.6; Outlays 3.8; Deficit -2.0; Individual Income Taxes 23.5 Deficit Fiscal Year to Aug 2011 $1,234,052 million Blog 09/18/11
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: 10/02/11 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

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

Motor vehicle sales and production in the US have been in long-term structural change. Table 24 provides the data on new motor vehicle sales and domestic car production in the US from 1990 to 2010. New motor vehicle sales grew from 14,137 thousand in 1990 to the peak of 17,806 thousand in 2000 or 29.5 percent. In that same period, domestic car production fell from 6,231 thousand in 1990 to 5,542 thousand in 2000 or -11.1 percent. New motor vehicle sales fell from 17,445 thousand in 2005 to 11,772 in 2010 or 32.5 percent while domestic car production fell from 4,321 thousand in 2005 to 2,840 thousand in 2010 or 34.3 percent. Domestic car production fell from 6,231 thousand in 1990 to 2,840 thousand in 2010 or 54.4 percent. In the first nine months of 2011, light vehicle deliveries accumulated to 9.518 million, which is higher by 10.4 percent relative to 8.620 million a year earlier (http://motorintelligence.com/m_frameset.html). The seasonally-adjusted annual rate of light vehicle sales in the US reached 13.1 million in Sep 2011 relative to 11.8 million in Sep 10 (http://motorintelligence.com/m_frameset.html).

Table 24, US, New Motor Vehicle Sales and Car Production, Thousand Units

	New Motor Vehicle Sales	New Car Sales and Leases	New Truck Sales and Leases	Domestic Car Production
1990	14,137	9,300	4,837	6,231
1991	12,725	8,589	4,136	5,454
1992	13,093	8,215	4,878	5,979
1993	14,172	8,518	5,654	5,979
1994	15,397	8,990	6,407	6,614
1995	15,106	8,536	6,470	6,340
1996	15,449	8,527	6,922	6,081
1997	15,490	8,273	7,218	5,934
1998	15,958	8,142	7,816	5,554
1999	17,401	8,697	8,704	5,638
2000	17,806	8,852	8,954	5,542
2001	17,468	8,422	9,046	4,878
2002	17,144	8,109	9,036	5,019
2003	16,968	7,611	9,357	4,510
2004	17,298	7,545	9,753	4,230
2005	17,445	7,720	9,725	4,321
2006	17,049	7,821	9,228	4,367
2007	16,460	7,618	8,683	3,924
2008	13,494	6,814	6.680	3,777
2009	10,601	5,456	5,154	2,247
2010	11,772	5,729	6,044	2,840

Source: US Census Bureau http://www.census.gov/compendia/statab/cats/wholesale_retail_trade/motor_vehicle_sales.html

Both manufacturers’ shipments and new orders fell 0.2 percent in Aug relative to Jul, as shown in Table 25. These data are very volatile as illustrated by growth of 1.2 percent of shipment in Jul relative to Jun and of new orders by 2.1 percent. Excluding more volatile transport equipment and defense new orders still fell 0.2 percent in Aug and new orders of machinery were flat in Aug after growing 1.9 percent in Jul. Automobile shipments fell 4.8 percent in Aug after strong growth of 3.0 percent in Jul. Volatility is illustrated by growth of 23.5 percent of new orders of nondefense aircraft in Aug following growth of 49.9 percent in Jul but decline of 24.0 percent in Jun. Capital goods, indicating investment, rose 4.0 percent in Aug after growing 3.1 percent in Jul. New orders of nondefense capital goods rose 5.0 percent in Aug after strong growth of 4.2 percent in Jul. Excluding more volatile aircraft, capital goods orders still grew 0.9 percent.

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

2011	Aug/Jul ∆%	Jul/Jun ∆%	Jun/May ∆%
All Mfg Industries
S	-0.2	1.2	0.6
NO	-0.2	2.1	-0.4
Excluding Transport
S	0.3	0.5	0.6
NO	-0.2	0.6	0.4
Excluding Defense
S	-0.3	1.6	0.6
NO	-0.2	2.3	-0.2
Durable Goods
S	-0.1	2.1	1.1
NO	-0.1	4.2	-1.1
Machinery
S	5.2	0.7	4.2
NO	0.0	1.9	-1.4
Computers & Electronic Products
S	0.2	1.7	-1.2
NO	0.6	-3.5	0.9
Computers
S	-3.7	4.6	3.6
NO	3.6	-6.3	2.6
Transport Equipment
S	-4.6	7.0	0.3
NO	-0.1	15.0	-6.6
Automobiles
S	-4.8	3.0	1.2
Motor Vehicles
S	-5.3	8.1	-2.6
NO	-5.3	8.5	-2.0
Nondefense Aircraft
S	2.7	8.8	3.2
NO	23.5	49.9	-24.0
Capital Goods
S	2.8	0.7	1.7
NO	4.0	3.1	-2.4
Nondefense Capital Goods
S	2.8	1.4	2.1
NO	5.0	4.2	-2.4
Capital Goods ex Aircraft
S	2.8	0.3	2.0
NO	0.9	-0.3	0.8
Nondurable Goods
S NO	-0.3	0.4	0.2

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

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

Chart 16 of the US Bureau of the Census shows monthly changes in manufacturers’ new orders in the past 12 months. Trends are difficult to discern for these data because of the significant volatility.

Chart 16, US, Manufacturers’ New Orders 2010-2011 Seasonally Adjusted, Month ∆%

Source: US Bureau of the Census http://www.census.gov/briefrm/esbr/www/esbr022.html

Table 26 provides a measure of relative dimension with the value of shipments and new orders not seasonally adjusted in Aug 2011. There is not much difference in dollar value of the three broad categories of all manufacturing industries, excluding transport and excluding defense. Durable goods represent 45.4 percent of shipments and 45.1 percent of new orders. Nondurable goods are 55.5 percent of shipments and 55.7 percent of new orders. Market participants focus on capital goods as indicator of investment. Capital goods are 16.8 percent of total shipments and 18.1 percent of total new orders but may have higher value as indicator of business sentiment.

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

Aug 2011	Shipments	New Orders
All Manufacturing Industries	470,438	468,533
Excluding Transport	420,859	412,798
Excluding Defense	460,755	459,598
Durable Goods	209,371	207,466
Machinery	31,439	32,084
Computers & Electronic Products	30,234	22,320
Computers	3,890	3,869
Transport Equipment	49,579	55,735
Automobiles	5,728
Motor vehicles	15,540	15,543
Nondefense Aircraft	7,768	14,463
Capital Goods	78,785	84,593
Nondefense Capital Goods	71,303	77,576
Capital Goods ex Aircraft	66,461	66,062
Nondurable Goods	261,067	261,067

Note: Transport: transportation

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

Manufacturers’ new orders in Aug not seasonally adjusted are provided in Table 27 from 1992 to 2011. The level in Aug 2011 of $468,533 million has returned close to the level of $468,853 million in 2007. The comparison is somewhat distorted by inflation in the latter years.

Table 27, US, Manufacturers’ New Orders NSA Millions of Dollars

Year
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

Aug
229,877
243,322
270,302
286,806
292,389
314,060
314,606
333,204
345,644
328,140
331,164
331,444
363,225
415,196
436,602
468,853
475,880
363,361
406,032
468,533

Source: http://www.census.gov/manufacturing/m3/

Table 28 provides percentage changes in Jan/Aug 2011 relative to Jan/Aug 2010. Percentage changes are quite high but the data are not adjusted for price changes. Total new orders of manufacturers rose 13.0 percent in Jan/Aug 2011 relative to the same period in 2010 and shipments increased 11.8 percent. The economy continues to move forward but at a pace that is not sufficiently rapid to eliminate employment and underemployment.

Table 28, US, Value of Manufacturers’ Shipments and New Orders, NSA, %

	Jan-Aug 2011/Jan-Aug 2010 ∆%
All Manufacturing Industries
S	11.8
NO	13.0
Excluding Transport
S	12.8
NO	13.0
Excluding Defense
S	12.8
NO	13.6
Durable Goods
S	7.9
NO	10.1
Machinery
S	12.0
NO	16.7
Computers & Electronic Products
S	2.5
NO	-0.2
Computers
S	13.4
NO	12.3
Transport Equipment
S	4.1
NO	12.8
Automobiles
S	4.3
Motor vehicles
S	7.0
NO	7.9
Nondefense Aircraft
S	6.7
NO	46.1
Capital Goods
S	5.3
NO	11.4
Nondefense Capital Goods
S	9.4
NO	14.6
Capital Goods ex Aircraft
S	9.9
NO	11.8
Nondurable Goods
S NO	15.3

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

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

Sales of merchant wholesalers except manufacturers’ sales branches and offices are shown in Table 29 for Jan-Aug 2011, Jan-Aug 2010 and percentage change. These data are volatile aggregating diverse categories of durable and nondurable goods without adjustment for price changes. Total sales for the US rose 15.1 percent in the first eight months of 2011 relative to the first eight months of 2010. Durable goods rose 12.3 percent with strong performance of 20.2 percent in machinery and 9.6 percent in automotive. Sales of nondurable goods rose 17.4 percent. The influence of commodity prices is revealed in the increase of 23.0 percent in the aggregate of petroleum plus groceries.

Table 29, US, Sales of Merchant Wholesalers Except Manufacturers’ Sales Branches and Offices, Billions of Dollars and ∆% NSA

	Jan-Aug 2011 $ B	Jan-Aug 2010 $ B	∆%
US Total	3,131	2,721	15.1
Durable	1,387	1,235	12.3
Automotive	216	197	9.6
Prof. Equip.	243	231	5.2
Computer Equipment	129	121	6.6
Electrical	260	234	11.1
Machinery	232	193	20.2
Not Durable	1,744	1,486	17.4
Drugs	270	249	8.4
Apparel	86	84	2.4
Groceries	381	347	9.8
Farm Products	172	117	47.0
Petroleum	480	353	35.9
Petroleum plus Groceries	861	700	23.0

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

Inventory/sales ratios of merchant wholesalers except manufacturers’ sales branches and offices are shown in Table 30. The total for the US has remained almost unaltered at 1.16 in Aug and July 2011 relative to 1.17 in Aug 2010. Inventory/sales ratios are higher in durable goods industries but still remain relatively stable with 1.48 in Aug 2011 relative to 1.51 in Aug 2010. Computer equipment operates with low inventory/sales ratios of 0.76 in Aug 2011 relative to 0.72 in Aug 2010 because of the capacity to fill orders on demand. As expected because of perishable nature, nondurable inventory/sales ratios are quite low with 0.89 in Aug 2011 almost the same as 0.88 in Aug 2010. There are exceptions such as 2.09 in Aug 2011 in apparel that is much higher than 1.68 in Aug 2010.

Table 30, Inventory/Sales Ratios of Merchant Wholesalers Except Manufacturers’ Sales Branches and Offices, % SA

	Aug 2011	Jul 2011	Aug 2010
US Total	1.16	1.16	1.17
Durable	1.48	1.50	1.51
Automotive	1.50	1.48	1.41
Prof. Equip.	1.02	1.04	0.98
Comp. Equip.	0.76	0.76	0.72
Electrical	1.21	1.22	1.18
Machinery	2.18	2.20	2.37
Not Durable	0.88	0.89	0.88
Drugs	0.89	0.90	0.95
Apparel	2.09	2.12	1.68
Groceries	0.67	0.67	0.64
Farm Products	1.11	1.08	1.02
Petroleum	0.43	0.44	0.46

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

Chart 17 provides the chart of the US Census Bureau with inventories/sales ratios of merchant wholesalers from 2002 to 2011 seasonally adjusted. Inventory/sales ratios rise during contractions as merchants are caught with increasing inventories because of weak sales and fall during expansions as merchants attempt to fill sales with existing stocks.

Chart 17, US, Monthly Inventories/Sales Ratios of Merchant Wholesalers, SA, 2002-2011

Source: US Census Bureau

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

Aug was a good month for construction spending in the US, as shown in Table 31. Construction spending at seasonally-adjusted annualized rate (SAAR) reached $799.1 billion in Aug, which was higher by 1.4 percent than in the prior month of Jul. Residential investment gained 0.9 in the month and nonresidential investment increased 1.6 percent. Public construction grew by 3.1 percent, which was higher than growth of 0.4 percent for private construction. Table 31 shows that nonresidential construction at $533.1 billion is much higher in value than residential construction at $246.1 billion while total private construction at $510.9 billion is much higher than public construction at $288.2 billion, all in SAAR.

Table 31, US, Value of Construction Put in Place in the United States Billion Dollars and ∆% from Prior Month

	Aug 2011 SAAR $ Billions	∆%
Total	799.1	1.4
Residential	246.1	0.9
Nonresidential	533.1	1.6
Total Private	510.9	0.4
Total Public	288.2	3.1

SAAR: seasonally adjusted annual rate; B: billions

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

Further information on construction spending is provided in Table 32. The original monthly estimates not-seasonally adjusted and their 12 months rates of change are provided in the first two columns while the SAAR and their monthly changes are provided in the final two columns. There has been improvement in construction in the US in 2011. On a monthly basis, construction fell five consecutive months from Dec 2010 to Mar 2011, increasing in four of the five months from Apr to Aug, with decline of 1.4 percent in Jul. The 12 months rates of change improved from minus 6.9 percent in Apr to positive 1.4 percent in Aug.

Table 32, US, Percentage Change in Value of Construction Put in Place, ∆%

	Value NSA Month $ Billions	12 Months ∆% NSA	Value SAAR $ Billions	Month ∆% SA
Aug 2011	77.3	1.4	799.1	1.4
Jul	72.3	-1.4	788.3	-1.4
Jun	72.4	-1.5	799.6	1.5
May	67.3	-1.8	787.4	2.5
Apr	61.8	-6.9	768.2	0.7
Mar	56.7	-5.8	762.6	-0.2
Feb	51.4	-4.5	764.2	-1.0
Jan	52.3	-5.6	771.9	-1,4
AE ∆%				-2.0
Dec 2010	60.1	-6.3	782.8	-2.5

Source: http://www.census.gov/const/www/c30index.html

The strong contraction of the value of construction in the US is revealed by Table 33. Construction spending in the first eight months of 2011, not seasonally adjusted, reached $511.4 billion, which is lower by 3.0 percent than $527.3 billion in the same period in 2010. The depth of the contraction is shown by the decline of construction spending of $1186.3 billion in the first eight months of 2006 to only $511.4 billion in the same period in 2011, or fall by minus 56.9 percent. The comparable decline from Jan-Aug 2005 to Jan-Aug 2011 is minus 30.9 percent. Construction spending in the first eight months of 2003 fell by 13.5 percent relative to the same period in 2011.

Table 33, US, Value of Construction Put in Place in the United States, Not Seasonally Adjusted, $ Billions and ∆%

Jan-Aug 2011 $ B	511.4
Jan-Aug 2010 $ B	527.3
∆% to 2011	-3.0
Jan-Aug 2006 $ B	1,186.3
∆% to 2011	-56.9
Jan-Aug 2005 $ B	739.9
∆% to 2011	-30.9
Jan-Aug 2003	591.2
∆% to 2011	-13.5

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

http://www.census.gov/const/C30/pr200708.pdf

http://www.census.gov/const/C30/pr200608.pdf

Monthly construction spending in the US in the month of Aug not seasonally adjusted is shown in Table 34 for the years between 2002 and 2011. The values of $76.2 billion in 2010 and $77.3 billion in 2011 are lower than $79.5 billion in 2002.

Table 34, US, Value of Construction Spending NSA Millions of Dollars

Year
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

Aug
79,460
85,191
96,164
106,706
110,434
110,430
99,786
84,368
76,170
77,260

Source: http://www.census.gov/const/www/c30index.html

Chart 18 of the US Bureau of the Census shows SAARs of construction spending for the US since 1993. Construction spending surged in nearly vertical slope after the stimulus of 2003 combining near zero interest rates and subsequent slow adjustment in 17 doses of increases by 25 basis points between Jun 2004 and Jun 2006 together with other housing subsidies. Construction spending collapsed after subprime mortgages became unviable with the fed funds rate increasing from 1.00 percent in Jun 2004 to 5.25 percent in Jun 2006. Subprime mortgages were programmed for refinancing in two years after increases in homeowner equity in the assumption that fed funds rates would remain low forever or increase in small increments (Gorton 2009EFM see http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html). Price declines of houses or even uncertainty prevented refinancing of subprime mortgages that defaulted, causing the financial crisis that eventually triggered the global recession

Chart 18, US, Construction Expenditures SAAR 1993-2011

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

Construction spending at SAARs in the quarter Jun to Aug is shown in Table 35 for the years between 2002 and 2011. There is a peak in 2006 with subsequent collapse of SAARs.

Table 35, US, Value of Construction Spending Seasonally Adjusted Annual Rate Millions of Dollars

Year	Jun	Jul	Aug
2002	846,777	847,129	839,008
2003	880,865	891,264	901,839
2004	983,072	1,006,119	1,013,724
2005	1,089,505	1,109,691	1,119,782
2006	1,172,932	1,165,093	1,158,193
2007	1,166,892	1,154,018	1,160,593
2008	1,074,637	1,066,919	1,057,459
2009	901,987	899,601	889,643
2010	810,437	788,993	791,749
2011	799,568	788,308	799,145

Source: http://www.census.gov/const/www/c30index.html

Annual value of construction spending in the US is shown in Table 36 from 1993 to 2010. Construction spending of $803,621 million in 2010 virtually returned to the level of $802,756 million in 2000.

Table 36, Annual Value of Construction Put in Place 1993-2010, Millions of Dollars

1993	485,548
1994	531,892
1995	548,666
1996	539,693
1997	631,853
1998	688,515
1999	744,551
2000	802,756
2001	840,249
2002	847,874
2003	891,497
2004	991,356
2005	1,140,136
2006	1,167,222
2007	1,152,351
2008	1,067,564
2009	903,201
2010	803,621

Source: http://www.census.gov/const/www/c30index.html

Weakness in the housing sector is being considered as an important factor of the financial crisis, global recession and slow growth recession. Chairman Bernanke (2011Oct4JEC, 2-3) states:

“Other sectors of the economy are also contributing to the slower-than-expected rate of expansion. The housing sector has been a significant driver of recovery from most recessions in the United States since World War II. This time, however, a number of factors--including the overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and the large number of “underwater” mortgages (on which homeowners owe more than their homes are worth)--have left the rate of new home construction at only about one-third of its average level in recent decades.”

The answer to these arguments can probably be found in the origins of the financial crisis and global recession. Let V(T) represent the value of the firm’s equity at time T and B stand for the promised debt of the firm to bondholders and assume that corporate management, elected by equity owners, is acting on the interests of equity owners. Robert C. Merton (1974, 453) states:

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

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

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

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

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

W = Y/r (1)

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

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

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

Consumer credit seasonally adjusted fell at the annual equivalent rate of 4.6 percent in Aug, as shown in Table 37. The decline was broad-based with revolving or credit card credit falling 3.4 percent and non-revolving credit declining by 5.2 percent. There are multiple factors of weakness in consumer credit: higher lending standards, repayment of credit card and other debt to increase savings, regulation and so on.

Table 37, US, Consumer Credit Seasonally Adjusted Annual Percentage Rate and Billions of Dollars

	IIQ2011	Jun	Jul	Aug
∆%
Total	3.5	5.6	5.9	-4.6
Revolving	1.5	3.9	-5.4	-3.4
Non Revolving	4.4	6.4	11.3	-5.2
$ Billions
Total	2442.5	2442.5	2454.4	2444.9
Revolving	795.9	795.9	792.3	790.1
Non Revolving	1646.6	1646.6	1662.1	1654.8

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

VB 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.

Table JPY provides the country data table for Japan followed with indicators released in the week of Sep 30.

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	Aug ∆% -0.2 12 months ∆% 2.6 Blog 09/18/11
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	Jul month SA ∆% 0.4 12 months NSA ∆% minus 0.8 Blog 09/25/11
Industrial Production	Aug SA month ∆%: 0.8 12 months NSA ∆% 0.6 Blog 10/02/11
Machine Orders	Total Jul ∆% –11.3 Private Jul ∆%: -15.9 Jul ∆% Excluding Volatile Orders -8.2 Blog 09/11/2011
Tertiary Index	Jul month SA ∆% -0.1 Jul 12 months NSA ∆% -0.2 Blog 09/18/2011
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: 10/02/11 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

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

Links to blog comments in Table CNY:

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

VD 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	Aug month ∆%: 0.2 12 months Aug ∆%: 2.5 Flash Sep ∆% 3.0 Blog 09/18/11 10/02/11
Producer Prices	Euro Zone industrial producer prices Aug 12 months ∆%: 5.9 Blog 10/09/11
Industrial Production	Jul month ∆%: 1.0 Jul 12 months ∆%: 4.2 Blog 09/18/11
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-Jul 2011/2010 Exports ∆%: 15.0 Imports ∆%: 16.0 Blog 09/18/11
HICP, Rate of Unemployment and GDP	Historical from 1999 to 2011 Blog 09/04/11

Links to blog comments in Table EUR: 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

Advanced economies are experiencing weak demand. Table 38 provides the volume of retail sales in the euro zone from Jan to Aug 2011. Retail sales fell 0.3 in Aug relative to Jul and fell 1.0 percent relative to a year earlier. Cumulative retail sales in the first eight months of 2011 are flat. The 12 months rates of growth have become negative since May.

Table 38, Euro Zone, Volume of Retail Sales, ∆%

	Month ∆%	12 Months ∆%
Aug 2011	-0.3	-1.0
Jul	0.2	-0.4
Jun	0.6	-0.8
May	-1.2	-1.9
Apr	0.7	1.1
Mar	-0.8	-1.4
Feb	0.2	1.1
Jan	0.2	0.6
Jan-Aug ∆%	-0.041
AE ∆%	-0.062

AE: Annual equivalent

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-05102011-AP/EN/4-05102011-AP-EN.PDF

Growth rates of retail sales of the euro zone by products are in Table 39. There is weakness in all products with an increase of 0.1 percent in food, drinks and tobacco in Aug relative to Jul the only positive percentage change in Table 39.

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

Aug 2011	Month ∆%	12 Months ∆%
Total	-0.3	-1.0
Food, Drinks, Tobacco	0.1	-0.2
Nonfood Products ex Automotive Fuel	-0.6	-1.3

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-05102011-AP/EN/4-05102011-AP-EN.PDF

Monthly and 12 months rates of change of retail sales by member countries of the euro zone are shown in Table 40. Retail sales are weak throughout the euro zone. The final line provides retail sales for the UK, which is not a member of the euro zone.

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

Aug 2011	Month ∆%	12 Months ∆%
Euro Zone	-0.3	-1.0
Germany	-2.9	-0.9
France	0.7	0.4
Netherlands	NA	NA
Finland	-2.2	0.3
Belgium	-0.4	-0.3
Portugal	0.8	-4.6
Ireland	-0.4	-3.3
Italy	NA	NA
Greece	NA	NA
Spain	0.1	-4.6
UK	-0.5	0.2

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

VE 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	Aug month SA ∆%: 0.0 Aug 12 months ∆%: 2.4 Blog 09/04/11
Wholesale Price Index	Aug month ∆%: 0.1 12 months NSA ∆%: 6.5 Blog 09/11/11
Industrial Production	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: 10/02/11 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

Several tables and charts facilitate analysis of machinery orders in Germany. Table 41 reveals strong fluctuations in an evident deceleration of total orders for industry of Germany. The same behavior is observed for foreign and domestic orders. An important aspect of Germany is that the bulk of orders is domestic or from other European countries while foreign orders have been growing rapidly.

Table 41, Germany, Volume of Orders Received in Manufacturing, Total, Domestic and Foreign, ∆%

	Total 12 M	Total M	Foreign 12 M	Foreign M	Home 12 M	Home M
2011
Aug	6.3	-1.4	4.0	0.1	9.3	-3.2
Jul	5.7	-2.6	5.3	-7.2	6.1	3.7
Jun	2.9	1.8	6.2	13.1	-1.2	-10.1
May	22.5	1.5	15.7	-6.0	30.5	10.7
Apr	7.3	2.9	10.5	3.5	3.4	2.2
Mar	8.8	-2.7	11.6	-2.9	5.5	-2.6
Feb	21.1	1.9	24.8	1.7	16.9	2.1
Jan	20.1	2.5	23.6	1.2	16.0	4.3
AE ∆%
2010
Dec	22.2	-3.0	27.3	-3.1	15.8	-2.9
Nov	21.5	4.8	26.8	7.4	15.6	1.7
Oct	14.1	1.9	17.7	1.7	10.4	2.0
Sep	13.9	-3.5	16.0	-6.1	11.6	-0.2
Aug	23.5	3.7	31.9	7.0	14.4	-0.5
Jul	14.2	-2.2	21.7	-3.7	6.3	-0.2
Jun	28.5	4.1	32.0	6.7	24.3	0.9
May	24.4	0.4	28.9	0.9	19.9	-0.1
Apr	29.3	2.5	33.0	2.5	25.2	2.5
Mar	29.4	5.6	32.3	6.1	26.4	5.0
Feb	23.4	-0.7	27.6	-0.7	18.6	-0.8
Jan	16.7	4.9	23.6	4.6	9.7	5.2
Dec 2009	9.2	-2.1	10.6	-2.4	7.4	-1.7
Dec 2008	-28.2	-7.1	-31.5	-9.7	-23.7	-4.0
Dec 2007	7.1	-1.3	9.1	-1.9	4.5	-0.5
Dec 2006	2.9	0.5	3.4	0.3	2.2	0.5
Dec 2005	4.9	-0.9	10.5	-1.5	-1.5	0.0
Dec 2004	12.7	6.6	12.9	8.4	12.7	4.9
Dec 2003	10.7	2.4	16.4	5.4	5.1	-0.8
Dec 2002	-0.2	-3.4	-0.8	-6.6	0.2	-0.3

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

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

Orders for investment goods of Germany are shown in Table 42. The same behavior as for total orders is observed in the form of declining orders from all sources. Domestic orders fell 3.8 percent in Aug. An important aspect of Germany’s economy shown in Tables 41 and 42 is the success in increasing the competitiveness of its economic activities as shown by rapid growth of orders for industry after the recession of 2001 in the period before the global recession beginning in late 2007.

Table 42, Germany, Volume of Orders Received of Investment Goods Industries, Total, Foreign and Domestic, ∆%

	Total 12 M	Total M	Foreign 12 M	Total M	Home 12 M	Home M
2011
Aug	5.8	-1.3	3.1	0.4	10.1	-3.8
Jul	8.5	-6.7	7.7	-12.3	9.6	3.6
Jun	7.1	5.1	10.6	20.6	1.2	-14.8
May	26.8	2.0	17.9	-8.3	40.4	19.0
Apr	11.8	4.8	15.6	6.6	6.3	2.2
Mar	10.7	-5.3	13.7	-4.9	6.5	-6.1
Feb	28.9	3.6	32.8	3.4	23.1	3.8
Jan	24.3	1.5	28.6	0.9	17.9	2.6
2010
Dec	27.3	-4.7	31.0	-6.2	21.3	-2.1
Nov	30.1	8.0	35.9	11.7	21.5	2.2
Oct	20.6	2.1	23.9	1.0	16.0	4.0
Sep	18.1	-5.2	20.4	-8.1	14.6	-0.2
Aug	29.3	7.5	42.8	11.4	12.0	1.4
Jul	14.1	-5.1	28.4	-7.4	-2.3	-1.3
Jun	33.5	6.7	41.3	10.8	22.2	0.7
May	25.9	1.8	35.6	1.4	13.6	2.5
Apr	30.1	2.1	40.1	3.0	17.4	0.6
Mar	26.2	7.4	33.8	8.4	16.1	5.7
Feb	20.3	-1.9	30.3	-1.5	8.1	-2.5
Jan	16.9	4.9	29.5	3.7	2.5	6.6
Dec 2009	8.1	-1.3	13.6	-1.8	0.5	-0.8
Dec 2008	-32.2	-7.4	-36.7	-10.7	-24.4	-3.1
Dec 2007	9.6	-0.2	11.6	-2.0	6.3	2.7
Dec 2006	3.6	2.1	3.8	2.3	3.1	1.9
Dec 2005	1.9	-2.6	9.8	-3.6	-8.5	-1.3
Dec 2004	19.4	11.2	18.6	12.2	3.4	-5.1
Dec 2003	11.7	2.1	17.2	5.0	5.4	-1.6
Dec 2002	-2.8	-4.3	-3.7	-8.1	-1.8	0.2

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

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

Chart 19 of the German Statistisches Bundesamt Deutschland shows the sharp upward trend of total orders in manufacturing before the global recession. There is also an obvious upward trend in the recovery from the recession with Germany’s economy being among the most dynamic in the advanced economy until the slowdown in 2011.

Chart 19, Germany, Volume of Total Orders in Manufacturing, Non-Adjusted, 2005=100

Source: Statistisches Bundesamt Deutschland http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/KeyIndicators/OrdersRecieved/liste__aeverg.psml

Chart 20 of the German Statistisches Bundesamt Deutschland provides a trend curve. The final segment on the right could be the beginning of flattening of the trend curve but it is early to reach conclusions.

Chart 20, Germany, Volume of Total Orders in Manufacturing and Trend, Non-Adjusted, 2005=100

Finally, Table 43 provides the volume of orders in manufacturing in the 12 months ending in Aug in the years from 2002 to 2011. The data show the dynamism of Germany under a new competitiveness strategy in the years before the global recession. Germany recovered sharply from the global recession also enjoying sound fiscal management. The global slowdown and the sovereign problems in the euro area are now threatening that dynamism.

Table 43, Germany, Volume of Total Orders Received in Manufacturing, ∆%

	12 Months ∆% Non-adjusted	Month ∆% Seasonally and Calendar Adjusted
Aug 2011	6.3	-1.4
Aug 2010	23.5	3.7
Aug 2009	-20.1	1.2
Aug 2008	-7.8	2.7
Aug 2007	4.8	0.6
Aug 2006	13.9	3.1
Aug 2005	8.5	-2.4
Aug 2004	10.3	-1.9
Aug 2003	-5.6	0.3
Aug 2002	-1.9	2.1

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

The production industries index of Germany in Table 44 shows contraction by 1.0 percent in Aug but 12-month rate of increase of 10.5 percent. Germany’s industry suffered decline of 15.5 percent in Aug 2009 relative to Aug 2008 and contraction of 5.1 in Aug 2008 relative to Aug 2007. Industry rebounded with growth of 14.9 percent in the 12 months ending in Aug 2010. The performance of industry from 2004 to 2007 was very vigorous.

Table 44, Germany, Production Industries, Month and 12 Months ∆%

	12 Months ∆% Non-adjusted	Month ∆% Seasonally and Calendar Adjusted
Aug 2011	10.5	-1.0
Aug 2010	14.9	1.2
Aug 2009	-15.5	1.5
Aug 2008	-5.1	1.9
Aug 2007	4.9	0.4
Aug 2006	8.7	0.4
Aug 2005	4.3	-2.6
Aug 2004	8.4	-0.9
Aug 2003	-5.8	-2.3
Aug 2002	-3.9	2.0

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Navigation/Statistics/TimeSeries/Indicators/ShortTermIndicators__nk.psml;jsessionid=023243C86CDC918D48BC9A4CABF77470.internet2

Table 45 provides production industries by components in the quarter Jun to Aug 2011. Jul was an excellent month but performance was negative in both Jun and Aug. Manufacturing rose 4.3 percent in Jul such that the decline by 1.0 percent in Aug is relative to a high level in Jul. The same is true of investment goods that gained 0.2 percent in Aug but after solid growth of 6.8 percent in Jul.

Table 45, Germany, Production Industries, Industry and Components, Month ∆%

	Aug/Jul ∆%	Jul/Jun ∆%	Jun/May ∆%
Production Industries	-1.0	3.9	-1.1
Industry	-1.0	4.2	-1.1
Mfg	-1.0	4.3	-1.2
Intermediate Goods	-0.7	2.3	0.7
Investment Goods	0.2	6.8	-2.7
Durable Goods	-10.0	15.0	-6.3
Nondurable Goods	-3.8	-0.1	-0.3
Energy	-1.8	-0.8	3.2

Seasonally Calendar Adjusted

Table 46 provides 12 months unadjusted rates of growth of industry and components in Germany from Jan 2010 to Sep 2011. Although there are sharp fluctuations in the data there is suggestion of deceleration that would be expected from the high earlier rates.

Table 46, Germany, Industry and Components, 12 Months ∆% Unadjusted

	IND	MFG	INTG	INVG	DG	NDG	EN
2011
Aug	12.2	12.1	10.8	19.1	4.1	0.9	-7.8
Jul	8.3	8.4	6.8	13.2	7.8	-0.1	-9.4
Jun	1.0	1.0	1.8	2.0	-10.5	-2.1	-6.3
May	21.4	21.5	18.0	28.2	21.6	13.2	-11.7
Apr	7.5	7.6	6.2	11.0	4.8	2.3	-7.5
Mar	10.7	10.9	10.2	14.8	8.5	1.9	-0.3
Feb	17.0	17.2	16.3	22.4	11.0	6.1	-2.9
Jan	17.1	17.2	17.0	23.2	11.2	4.4	-3.0
2010
Dec	17.5	17.6	14.5	26.3	9.1	2.9	4.8
Nov	13.8	13.8	13.1	19.0	7.9	3.6	2.9
Oct	9.9	10.1	10.1	13.9	6.5	0.9	0.2
Sep	9.5	9.3	12.1	10.0	7.9	1.7	-2.4
Aug	17.2	17.2	19.0	20.3	19.5	6.9	-2.1
Jul	9.1	8.8	12.7	8.7	7.2	0.9	-0.2
Jun	16.2	16.1	20.5	16.0	20.5	5.3	-2.5
May	13.3	13.3	20.2	11.6	10.7	1.7	12.8
Apr	14.9	14.8	21.8	15.3	8.5	0.0	9.9
Mar	14.2	14.5	20.4	11.7	11.8	6.4	7.2
Feb	7.1	7.5	10.8	7.0	7.4	-1.2	5.4
Jan	0.6	0.9	6.7	-3.4	-0.4	-3.9	3.3

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

VF 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	Aug month ∆% 0.5 12 months ∆%: 2.2 09/18/11
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	Jul/Jun SA ∆%: Industrial Production 1.5; Manufacturing 1.4 Jun 12 months NSA ∆%: Industrial Production 2.8; Manufacturing 4.2 Blog 09/11/11
Consumer Spending	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 Mfg Business Climate 99 Household Confidence 80 Wholesale Trade 99 Blog 9/25/11

Links to blog comments in Table FR: 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

Month and 12 months rates of growth of exports and imports of France are provided in Table 47. Exports rose 6.1 percent in Aug and 10.4 percent in 12 months. Imports rose 1.8 percent in Aug and 8.4 percent in 12 months. Export growth has been weak in 2011.

Table 47, France, Exports and Imports, Month and 12 Months ∆%

	Exports Month ∆%	Exports 12 Months ∆%	Imports Month ∆%	Imports 12 Months ∆%
Aug 2011	6.1	10.4	1.8	8.4
Jul	1.1	2.8	3.9	9.5
Jun	0.5	3.8	-3.2	8.0
May	0.6	14.9	-0.2	15.8
Apr	-2.1	7.5	0.7	14.3
Mar	1.5	11.7	0.2	14.6
Feb	1.1	13.8	0.7	21.6
Jan	2.3	13.4	4.3	20.1
Dec 2010	-4.6	13.4	-0.9	14.6
Dec 2009	0.6	-9.9	-0.2	-2.4
Dec 2008	1.4	-7.4	-4.9	-11.3
Dec 2007	5.5	5.9	2.5	8.3
Dec 2006	0.9	7.4	4.0	7.1
Dec 2005	-3.8	10.6	-1.4	14.3
Dec 2004	-6.3	-3.9	-2.6	5.9
Dec 2003	4.9	2.9	2.7	2.8

Source: http://lekiosque.finances.gouv.fr/Appchiffre/nationales/surcadre_nationales.asp?TF=revue

France has been running a trade deficit fluctuating around €6,000 million, as shown in Table 48.

Table 48, France, Exports, Imports and Trade Balance, € Millions

	Exports	Imports	Trade Balance
Aug 2011	37,420	42,387	-4,967
Jul	35,265	41,628	-6,363
Jun	34,891	40,068	-5,177
May	34,733	41,378	-6,645
Apr	34,540	41,441	-6901
Mar	35,300	41,140	-5,840
Feb	34,778	41,067	-6,289
Jan	34,402	40,780	-6,378
Dec 2010	33,639	39,093	-5,454

Source: http://lekiosque.finances.gouv.fr/Appchiffre/nationales/surcadre_nationales.asp?TF=revue

VG 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 ∆%: 0.1 Aug 12 months ∆%: 3.1 Blog 10/02/11
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	Jul month ∆%: –0.7 12 months ∆%: -1.6 Blog 09/18/11
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 Jul SA -€ 2196 million versus Jul -€ 1985 Exports Jul month SA ∆%: 1.0 Imports Jul month SA ∆%: 1.6 Exports 12 months NSA ∆%: 5.4 Imports 12 months NSA ∆%: 6.1 Blog 09/18/11

Links to blog comments in Table IT: 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

09/18/22 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

VH 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	Aug month ∆%: 0.6 Aug 12 months ∆%: 4.5 Blog 09/18/11
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	Jul 2011/Jul 2010 NSA ∆%: Industrial Production -0.7; Manufacturing 1.9 Jul/Jun 2011 ∆%: Industrial Production -0.2 Manufacturing 0.1 Blog 09/11/11
Retail Sales	Aug month SA ∆%: 0.0 Jul 12 months ∆%: 4.7 Blog 09/18/11
Labor Market	May-Jul Unemployment Rate: 7.9% Blog 09/18/11
Trade Balance	Balance Jul -₤4,450 billion Exports Jul ∆%: 3/2 May/Jul ∆%: 8.1 Imports Jun ∆%: 2.9 May/Jul ∆%: 8.1 Blog 09/18/11

Links to blog comments in Table UK: 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

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

The UK Office for National Statistics has revised the national accounts since 1998 (http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/impact-of-changes-in-national-accounts-and-economic-commentary-for-q2-2011/index.html). The new data are analyzed here. Table 49 provides quarter on quarter chained value measures of GDP since 2001. Growth in IIQ2011 was reduced to 0.1 percent. Recovery in the UK has been subdued relative to the rates prevailing before the global recession.

Table 49, UK, Percentage Change of GDP from Prior Quarter, Chained Value Measures ∆%

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

Source: http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q2-2011/tsd-qna-2011-q2.html

Revised annual data in Table 50 show the strong impact of the global recession in the UK with decline of GDP of 4.4 percent in 2009 after dropping 1.1 percent in 2008. Recovery of 1.8 percent is relatively low compared to annual growth rates in 2007 and earlier years.

Table 50, UK, Revised National Accounts GDP Growth ∆%

	∆% on Prior Year
1998	3.8
1999	3.7
2000	4.5
2001	3.2
2002	2.7
2003	3.5
2004	3.0
2005	2.1
2006	2.6
2007	3.5
2008	-1.1
2009	-4.4
2010	1.8

Source: http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/impact-of-changes-in-national-accounts-and-economic-commentary-for-q2-2011/index.html

Chart 21 of the UK Office for National Statistics provides output indices chained value measures (CVM). The contraction in manufacturing was much stronger than in services that softened the impact on overall output.

Chart 21, UK, Output Indices

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q2-2011/index.html

GDP uses at chained value measures at provided in Table 51. The UK is experiencing weak internal demand as in most advanced economies. While gross fixed capital formation has fluctuated with some good quarters, household expenditure has been negative in the past four consecutive quarters.

Table 51, UK, GDP Uses at Chained Volume Measures ∆%

	GDP	Household Expenditure	Gross Fixed Capital Formation
IIQ2011	0.1	-0.8	1.7
IQ2011	0.4	-0.6	-2.8
IVQ2010	-0.5	-0.1	-0.5
IIIQ2010	0.6	-0.2	1.1
IIQ2010	1.1	0.6	-2.1
IQ2010	0.2	0.0	4.3

Source: http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q2-2011/index.html

Growth of UK GDP from the same quarter a year earlier at chained value measures in shown in Table 52. Growth in IIQ2011 relative to IIQ2010 was only 0.6 percent. The rates of growth during the recovery in 2010 and 2011 have been much lower than rates of growth in 2007 and earlier years.

Table 52, UK, Percentage Change of GDP from Same Quarter a Year Earlier, Chained Value Measures ∆%

	IQ	IIQ	IIIQ	IV
2011	1.6	0.6
2010	0.9	2.2	2.6	1.3
2009	-6.9	-5.9	-3.8	-0.8
2008	3.1	0.6	-2.6	-5.4
2007	2.4	3.2	4.2	4.1
2006	3.3	2.9	2.2	2.1
2005	1.3	1.7	2.5	2.8
2004	4.3	3.4	2.5	1.7
2003	2.9	3.4	3.6	4.2
2002	2.3	2.6	2.7	3.0
2001	3.6	2.9	3.2	2.9
2000	4.7	5.2	4.2	3.7

Source: http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q2-2011/tsd-qna-2011-q2.html

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

Table 53 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 53 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 12.2 percent by Fri Oct 7, 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 53 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 53, 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	10/07 /2011
Rate	1.1423	1.5914	1.192	1.338
CNY/USD	01/03 2000	07/21 2005	7/15 2008	10/07 2011
Rate	8.2798	8.2765	6.8211	6.375
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 54 extracts four rows of Table 53 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 56 below, the dollar has devalued again to USD 1.338/EUR or by 12.2 percent. Yellen (2011AS, 6) admits that Fed monetary policy results in dollar devaluation with the objective of increasing net exports, which was the policy that Joan Robinson (1947) labeled as “beggar-my-neighbor” remedies for unemployment. China fixed the CNY to the dollar for a long period at a highly undervalued level of around CNY 8.2765/USD until it revalued to CNY 6.8211/USD until Jun 7, 2010, or by 17.6 percent and after fixing it again to the dollar, revalued to CNY 6.375/USD on Fri Oct 7, 2011, or by an additional 6.5 percent, for cumulative revaluation of 22.9 percent

Table 54, 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	10/07 /2011
Rate	1.1423	1.5914	1.192	1.338
CNY/USD	01/03 2000	07/21 2005	7/15 2008	10/07 2011
Rate	8.2798	8.2765	6.8211	6.375

Source: Table 53

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 55. 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 55, 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 53 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 56, 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 10/07/11,” 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 10/07/11” are in the range from 1.4 percent for the Dow Asia Pacific and 14.6 percent for the DJIA. The carry trade from zero interest rates to leveraged positions in risk financial assets has proved strongest for commodity exposures. Before the current round of risk aversion, all assets in the column “∆% Trough to 10/07/11” had double digit gains relative to the trough around Jul 2, 2010. There are now several valuations lower than those at the trough around Jul 2: European stocks index STOXX 50 is now 3.2 percent below the trough on Jul 2, 2010; the NYSE Financial Index is 10.3 percent below the trough on Jul 2, 2010; and Japan’s Nikkei Average is 2.5 percent below the trough on Aug 31, 2010 and 24.5 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 8605.62 on Fri Oct 7, which is 19.1 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 0.1 percent above the trough on Apr 25, 2010. The dollar depreciated by 12.2 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 10/07/2011” shows gains for all financial assets in Table 56 with exception of loss by 0.4 percent for the Dow Asia Pacific index and loss of 1.1 percent for the Nikkei Average. 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 56 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 10/07/11” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Oct 7, 2011. Most financial risk assets had gained not only relative to the trough as shown in column “∆% Trough to 10/07/11” but also relative to the peak in column “∆% Peak to 10/07/11.” There are now no indexes above the peak, not even the DJ UBS Commodity Index that is 2.2 percent below the peak. There are several indexes well below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 28.5 percent, Nikkei Average by 24.5 percent, Shanghai Composite by 25.4 percent, STOXX 50 by 18.1 percent and Dow Global by 15.8 percent. S&P 500 is lower relative to the peak by 5.1 percent, DJ Asia Pacific is lower by 11.2 percent and the DJIA is lower by 0.9 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 56, Stock Indexes, Commodities, Dollar and 10-Year Treasury

	Peak	Trough	∆% to Trough	∆% Peak to 10/07 /11	∆% Week 10/ 07/11	∆% Trough to 10/ 07/11
DJIA	4/26/ 10	7/2/10	-13.6	-0.9	1.7	14.6
S&P 500	4/23/ 10	7/20/ 10	-16.0	-5.1	2.1	12.9
NYSE Finance	4/15/ 10	7/2/10	-20.3	-28.5	0.2	-10.3
Dow Global	4/15/ 10	7/2/10	-18.4	-15.8	1.8	3.2
Asia Pacific	4/15/ 10	7/2/10	-12.5	-11.2	-0.4	1.4
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-24.5	-1.1	-2.5
China Shang.	4/15/ 10	7/02 /10	-24.7	9/30/11 -25.4	9/30/11 -3.0	9/30/11 -0.9
STOXX 50	4/15/10	7/2/10	-15.3	-18.1	2.9	-3.2
DAX	4/26/ 10	5/25/ 10	-10.5	-10.4	3.2	0.1
Dollar Euro	11/25 2009	6/7 2010	21.2	11.6	0.1	-12.2
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	-2.2	1.1	14.4
10-Year Tre.	4/5/ 10	4/6/10	3.986	2.078

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 57 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 57 for Oct 7 shows that the S&P 500 is now 4.7 percent below the Apr 26, 2010 level and the DJIA is 0.9 percent below the level on Apr 26, 2010. Multiple rounds of risk aversion eroded the earlier gains, showing that risk aversion can destroy market value even with zero interest rates. Much the same as zero interest rates and quantitative easing have not had any effects in recovering economic activity while distorting financial markets and resource allocation.

Table 57, 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

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

Table 58, 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 58 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 10.2 percent to ZAR 7.98/USD on Oct 7, which is still 31.1 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 3.8 percent stronger at SGD 1.297/USD on Oct 7 relative to the trough of depreciation but still stronger by 16.5 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 1.9 percent relative to the trough to BRL 1.77/USD on Oct 7 but still stronger by 27.2 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. Unconventional monetary policy of zero interest rates and quantitative easing creates trends such as the depreciation of the dollar followed by Table 58 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 58, Exchange Rates

	Peak	Trough	∆% P/T	Oct 7, 2011	∆T Oct 7 2011	∆P Oct 7 2011
EUR USD	7/15 2008	6/7 2010		10/07 2011
Rate	1.59	1.192		1.338
∆%			-33.4		10.9	-18.8
JPY USD	8/18 2008	9/15 2010		10/07 2011
Rate	110.19	83.07		76.709
∆%			24.6		7.7	30.4
CHF USD	11/21 2008	12/8 2009		10/07 2011
Rate	1.225	1.025		0.915
∆%			16.3		10.7	25.3
USD GBP	7/15 2008	1/2/ 2009		10/07 2011
Rate	2.006	1.388		1.556
∆%			-44.5		10.8	-28.9
USD AUD	7/15 2008	10/27 2008		10/07 2011
Rate	1.0215	1.6639		0.977
∆%			-62.9		38.5	-0.2
ZAR USD	10/22 2008	8/15 2010		10/07 2011
Rate	11.578	7.238		7.98
∆%			37.5		-10.2	31.1
SGD USD	3/3 2009	8/9 2010		10/07 2011
Rate	1.553	1.348		1.297
∆%			13.2		3.8	16.5
HKD USD	8/15 2008	12/14 2009		10/07 2011
Rate	7.813	7.752		7.781
∆%			0.8		-0.4	0.4
BRL USD	12/5 2008	4/30 2010		10/07 2011
Rate	2.43	1.737		1.77
∆%			28.5		-1.9	27.2
CZK USD	2/13 2009	8/6 2010		10/07 2011
Rate	22.19	18.693		18.58
∆%			15.7		0.6	16.3
SEK USD	3/4 2009	8/9 2010		10/07 2011
Rate	9.313	7.108		6.802
∆%			23.7		4.3	26.2
CNY USD	7/20 2005	7/15 2008		10/07 2011
Rate	8.2765	6.8211		6.375
∆%			17.6		6.5	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 59, 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 59. The highest yield in the decade was 5.510 percent on May 1, 2001 that would result in a loss of principal of 22.9 percent relative to the price on Nov 4. The Fed has created a “duration trap” of bond prices. Duration is the percentage change in bond price resulting from a percentage change in yield or what economists call the yield elasticity of bond price. Duration is higher the lower the bond coupon and yield, all other things constant. This means that the price loss in a yield rise from low coupons and yields is much higher than with high coupons and yields. Intuitively, the higher coupon payments offset part of the price loss. Prices/yields of Treasury securities were affected by the combination of Fed purchases for its program of quantitative easing and also by the flight to dollar-denominated assets because of geopolitical risks in the Middle East, subsequently by the tragic earthquake and tsunami in Japan and now again by the sovereign risk doubts in Europe and the growth recession in the US and the world. The yield of 2.078 percent at the close of market on Fr Oct 7, 2011 would be equivalent to price of 104.9161 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 3.6 percent relative to the price on Nov 4, 2010, one day after the decision on the second program of quantitative easing. If inflation accelerates, yields of Treasury securities may rise sharply. Yields are not observed without special yield-lowering effects such as the flight into dollars caused by the events in the Middle East, continuing purchases of Treasury securities by the Fed, the tragic earthquake and tsunami affecting Japan, 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 59 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 5, 2011, the line “Reserve Bank credit” in the Fed balance sheet stood at $2843 billion, or $2.8 trillion, with portfolio of long-term securities of $2623 billion, or $2.6 trillion, consisting of $1576 billion Treasury nominal notes and bonds, $68 billion of notes and bonds inflation-indexed, $108 billion Federal agency debt securities and $871 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1624 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 III 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 59, 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

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

VII Economic Indicators. Crude oil input in refineries fell to 15,153 thousand barrels per day on average in the four weeks ending on Sep 30 from 15,240 thousand barrels per day in the four weeks ending on Sep 23, as shown in Table 60. The rate of capacity utilization in refineries continues at a high level of 87.7 percent. Imports of crude oil rose from 8,755 thousand barrels per day on average to 8,788 thousand barrels per day. Decreasing utilization with increasing imports resulted in decrease of commercial crude oil stocks by 4.7 million barrels from 341.0 million barrels on Sep 23 to 336.3 million on Sep 30. Gasoline stocks fell 1.2 million barrels and stocks of fuel oil fell 0.8 million barrels. Supply of gasoline fell from 9,060 thousand barrels per day on Oct 1, 2010, to 8,907 thousand barrels per day on Sep 30, 2011, or by 1.7 percent, while fuel oil supply rose 1.9 percent. Part of the fall in consumption of gasoline is due to higher prices and part to the growth recession. Table 60 also shows increase in the world price of crude oil by 45.5 percent from Oct 1, 2010 to Sep 30, 2011. Gasoline prices rose 25.7 percent from Oct 4, 2010 to Oct 3, 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 60, US, Energy Information Administration Weekly Petroleum Status Report

Four Weeks Ending Thousand Barrels/Day	09/30/11	09/23/11	10/01/10
Crude Oil Refineries Input	15,153	15,240	14,718
Refinery Capacity Utilization %	87.7	88.0	86.1
Motor Gasoline Production	9,250	9,218	9,031
Distillate Fuel Oil Production	4,548	4,518	4,278
Crude Oil Imports	8,788	8,755	9,037
Motor Gasoline Supplied	8,907 ∆% 2011/2010= –-1.7%	8,907	9,060
Distillate Fuel Oil Supplied	3,863 ∆% 2011/2010 = 1.9%	3,801	3,789
	09/30/11	09/23/11	10/01/10
Crude Oil Stocks Million B	336.3 ∆= -4.7 MB	341.0	360.9
Motor Gasoline Million B	213.7 ∆= -1.2 MB	214.9	219.9
Distillate Fuel Oil Million B	156.9 ∆= -0.8 MB	157.7	172.5
World Crude Oil Price $/B	103.17 ∆% 2011/2010 45.5	108.58	76.14
	10/03/11	09/26/11	10/04/10
Regular Motor Gasoline $/G	3.433 ∆% 2011/2010 25.7	3.509	2.732

B: barrels; G: gallon

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

Chart 22 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. Stocks have trended down in the past few weeks.

Chart 22, 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 23 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.

Chart 23, US, Crude Oil Stocks

Source: US Energy Information Administration

http://www.eia.gov/todayinenergy/detail.cfm?id=3371

Chart 24 of the US Energy Information Administration shows the price of WTI crude oil since the 1980s. Chart 24 captures the commodity shocks during the past decade. The illusion 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 collapsing to zero. After moderation of risk aversion, the carry trade returned with resulting sharp upward trend of crude prices.

Chart 24, Crude Oil Futures

Source: US Energy Information Administration

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

Initial claims for unemployment insurance are shown in Table 61. Seasonally adjusted claims rose 6,000 from 395,000 in the week of Sep 24 to 401,000 on Oct 1. Not seasonally adjusted claims rose 958 from 328,073 in the week of Sep 24 to 329,029 in the week of Oct 1.

Table 61, US, Initial Claims for Unemployment Insurance

2011	SA	NSA	4-week MA SA
Oct 1	401,000	329,029	414,000
Sep 24	395,000	328,073	418,000
Change	+6,000	+956	-4.000
Sep 17	428,000	353,820	422,250
Prior Year	449,000	373,681	453,000

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

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

Table 62 uses the database of the Bureau of Labor Statistics (BLS) of the Department of Labor to obtain seasonally adjusted and not seasonally adjusted claims during the comparable week in Sep from 2000 to 2011. Seasonally-adjusted claims always exceed not seasonally adjusted claims. Both seasonally and not seasonally adjusted claims have declined from the levels of recession in 2008 and 2009. The difference in the current labor market is the decline of hiring by 17 million per year that makes adjustment to layoffs quite difficult.

Table 62, US, Unemployment Insurance Weekly Claims

	Not Seasonally Adjusted Claims	Seasonally Adjusted Claims
Sep 30, 2000	227,249	292,000
Sep 29, 2001	400,400	517,000
Sep 28, 2002	319,063	409,000
Oct 4, 2003	337,880	386,000
Oct 2, 2004	279,591	335,000
Oct 1, 2005	313,847	384,000
Sep 30, 2006	249,288	309,000
Sep 29, 2007	255,431	317,000
Oct 4, 2008	426,786	481,000
Oct 3, 2009	456,233	535,000
Oct 2, 2010	373,681	449,000
Oct 1, 2011	329,029	401,000

Source: http://workforcesecurity.doleta.gov/unemploy/wkclaims/report.asp

VIII 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 63 provides inflation of the CPI. In Jan-Aug 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 Aug, CPI inflation of all items not seasonally adjusted was 3.8 percent. The second row provides the same measurements for the CPI of all items excluding food and energy: 2.6 percent annual equivalent in Jan-Aug 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 0.01 percent for three months or virtually zero, 0.03 percent for six months, 0.09 percent for 12 months, 0.29 percent for two years, 0.49 percent for three years, 1.08 percent for five years, 1.60 percent for seven years, 2.08 percent for ten years and 3.02 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 63. 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 63, US, Consumer Price Index Percentage Changes 12 months NSA and Annual Equivalent ∆%

	∆% 12 Months Aug 2011/Aug 2010 NSA	∆% Annual Equivalent Jan-Aug 2011 SA
CPI All Items	3.8	4.1
CPI ex Food and Energy	2.0	2.6

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

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

Appendix I. The Great Inflation

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

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

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

Chart I1, Brazil, Phillips Circuit 1963-1987

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

DeLong (1997, 247-8) shows that the 1970s were the only peacetime period of inflation in the US without parallel in the prior century. The price level in the US drifted upward since 1896 with jumps resulting from the two world wars: “on this scale, the inflation of the 1970s was as large an increase in the price level relative to drift as either of this century’s major wars” (DeLong, 1997, 248). Monetary policy focused on accommodating higher inflation, with emphasis solely on the mandate of promoting employment, has been blamed as deliberate or because of model error or imperfect measurement for creating the Great Inflation (http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html). As DeLong (1997) shows, the Great Inflation began in the mid 1960s, well before the oil shocks of the 1970s (see also the comment to DeLong 1997 by Taylor 1997, 276-7). TableI1 provides the change in GDP, CPI and the rate of unemployment from 1960 to 1990. There are three waves of inflation (1) in the second half of the 1960s; (2) from 1973 to 1975; and (3) from 1978 to 1981. In one of his multiple important contributions to understanding the Great Inflation, Meltzer (2005) distinguishes between one-time price jumps, such as by oil shocks, and a “maintained” inflation rate. Meltzer (2005) uses a dummy variable to extract the one-time oil price changes, resulting in a maintained inflation rate that was never higher than 8 to 10 percent in the 1970s. There is revealing analysis of the Great Inflation and its reversal by Meltzer (2005, 2010a, 2010b).

Table I1, US Annual Rate of Growth of GDP and CPI and Unemployment Rate 1960-1982

	∆% GDP	∆% CPI	UNE
1960	2.5	1.4	6.6
1961	2.3	0.7	6.0
1962	6.1	1.3	5.5
1963	4.4	1.6	5.5
1964	5.8	1.0	5.0
1965	6.4	1.9	4.0
1966	6.5	3.5	3.8
1967	2.5	3.0	3.8
1968	4.8	4.7	3.4
1969	3.1	6.2	3.5
1970	0.2	5.6	6.1
1971	3.4	3.3	6.0
1972	5.3	3.4	5.2
1973	5.8	8.7	4.9
1974	-0.6	12.3	7.2
1975	-0.2	6.9	8.2
1976	5.4	4.9	7.8
1977	4.6	6.7	6.4
1978	5.6	9.0	6.0
1979	3.1	13.3	6.0
1980	-0.3	12.5	7.2
1981	2.5	8.9	8.5
1982	-1.9	3.8	10.8
1983	4.5	3.8	8.3
1984	7.2	3.9	7.3
1985	4.1	3.8	7.0
1986	3.5	1.1	6.6
1987	3.2	4.4	5.7
1988	4.1	4.4	5,3
1989	3.6	4.6	5.4
1990	1.9	6.1	6.3

Note: GDP: Gross Domestic Product; CPI: consumer price index; UNE: rate of unemployment; CPI and UNE are at year end instead of average to obtain a complete series

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

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

http://www.bls.gov/web/empsit/cpseea01.htm

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

There is a false impression of the existence of a monetary policy “science,” measurements and forecasting with which to steer the economy into “prosperity without inflation.” Market participants are remembering the Great Bond Crash of 1994 shown in Table I2 when monetary policy pursued nonexistent inflation, causing trillions of dollars of losses in fixed income worldwide while increasing the fed funds rate from 3 percent in Jan 1994 to 6 percent in Dec. The exercise in Table I2 shows a drop of the price of the 30-year bond by 18.1 percent and of the 10-year bond by 14.1 percent. CPI inflation remained almost the same and there is no valid counterfactual that inflation would have been higher without monetary policy tightening because of the long lag in effect of monetary policy on inflation (see Culbertson 1960, 1961, Friedman 1961, Batini and Nelson 2002, Romer and Romer 2004). The pursuit of nonexistent deflation during the past ten years has resulted in the largest monetary policy accommodation in history that created the 2007 financial market crash and global recession and is currently preventing smoother recovery while creating another financial crash in the future. The issue is not whether there should be a central bank and monetary policy but rather whether policy accommodation in doses from zero interest rates to trillions of dollars in the fed balance sheet endangers economic stability.

Table I2, Fed Funds Rates, Thirty and Ten Year Treasury Yields and Prices, 30-Year Mortgage Rates and 12-month CPI Inflation 1994

1994	FF	30Y	30P	10Y	10P	MOR	CPI
Jan	3.00	6.29	100	5.75	100	7.06	2.52
Feb	3.25	6.49	97.37	5.97	98.36	7.15	2.51
Mar	3.50	6.91	92.19	6.48	94.69	7.68	2.51
Apr	3.75	7.27	88.10	6.97	91.32	8.32	2.36
May	4.25	7.41	86.59	7.18	88.93	8.60	2.29
Jun	4.25	7.40	86.69	7.10	90.45	8.40	2.49
Jul	4.25	7.58	84.81	7.30	89.14	8.61	2.77
Aug	4.75	7.49	85.74	7.24	89.53	8.51	2.69
Sep	4.75	7.71	83.49	7.46	88.10	8.64	2.96
Oct	4.75	7.94	81.23	7.74	86.33	8.93	2.61
Nov	5.50	8.08	79.90	7.96	84.96	9.17	2.67
Dec	6.00	7.87	81.91	7.81	85.89	9.20	2.67

Notes: FF: fed funds rate; 30Y: yield of 30-year Treasury; 30P: price of 30-year Treasury assuming coupon equal to 6.29 percent and maturity in exactly 30 years; 10Y: yield of 10-year Treasury; 10P: price of 10-year Treasury assuming coupon equal to 5.75 percent and maturity in exactly 10 years; MOR: 30-year mortgage; CPI: percent change of CPI in 12 months

Sources: yields and mortgage rates http://www.federalreserve.gov/releases/h15/data.htm CPI ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.t

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