CMP Associates Regulation Blog: US Growth Standstill at 0.8 Percent Annual Rate, Stagnant Personal Income and Consumption and World Financial Turbulence

US Growth Standstill at 0.8 Percent Annual Rate, Stagnant Personal Income and Consumption and World Financial Turbulence

Carlos M. Pelaez

Executive Summary

I United States Growth Standstill

II Stagnant Personal Income and Consumption

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

Executive Summary

Real GDP grew at the seasonally-adjusted annual equivalent rate of 0.4 percent in the first quarter of 2011, IQ2011, and at 1.3 percent in IIQ2011. Discounting 0.4 percent to one quarter is 0.1 percent and discounting 1.3 percent is 0.32 percent. Real GDP growth in the first half of 2011 accumulated to 0.42 percent (1.001 x 1.0032), which is equal to 0.8 percent (compounding 1.0042 for two successive half years). The US economy is close to a standstill. The Bureau of Economic Analysis (BEA) of the US Department of Commerce released on Thu Sep 29 the third estimate of GDP for IIQ2011 that was revised upwardly to 1.3 percent from the earlier second estimate of 1.0 percent with less information released on Aug 26. GDP fell 5.1 percent during the contraction from IVQ2007 to IIQ2009 but has grown only 4.9 percent from IIIQ2009 to IIQ2011. Table 4 (anticipated here from the text) shows that the current expansion is the weakest cyclical expansion after contractions since the 1950s. After the revision of IIQ2011, average growth in the eight quarters of expansion is 2.4 percent in annual equivalent while the average growth rate in cyclical expansion had been 6.2 percent.

Table 4, US, Number of Quarters, Cumulative Growth and Average Annual Equivalent Growth Rate in Cyclical Expansions

	Number of Quarters	Cumulative Growth ∆%	Average Annual Equivalent Growth Rate
IIIQ 1954 to IQ1957	11	12.6	4.4
IIQ1958 to IIQ1959	5	10.2	8.1
IIQ1975 to IVQ1976	8	9.5	4.6
IQ1983 to IV1985	13	19.6	5.7
Average Four Above Expansions			6.2
IIIQ2009 to IIQ2011	8	4.9	2.4

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

Personal income data in Table E1 (abridged here from the text) reveal the weakness of the economy. The column RDPI (real disposable income or after-tax income) shows that after eight months in 2011 in Jan-Aug growth of RDPI has accumulated to 0.0 percent. Growth of real personal consumption expenditures (RPCE) accumulated to 0.8 percent in Jan-Aug, which is equivalent to yearly growth of 1.2 percent. Inflation creates the illusion that there has been growth of income, when in fact RDPI stagnated, and growth of consumption, which in fact has grown at the mediocre annual rate of 1.2 percent. The growth engine of the US economy has stalled with resulting adverse effects on job creation and opportunities for advancement.

Table E1, US, Percentage Change from Prior Month Seasonally Adjusted of Personal Income, Disposable Income and Personal Consumption Expenditures %

	NPI	NDPI	RDPI	NPCE	RPCE
2011
Aug	-0.1	0.0	-0.3	0.2	0.0
Jul	0.1	0.1	-0.2	0.7	0.4
Jun	0.2	0.1	0.3	-0.2	-0.1
May	0.3	0.2	0.0	0.2	0.0
Apr	0.4	0.3	0.0	0.3	-0.1
Mar	0.5	0.4	0.0	0.6	0.2
Feb	0.6	0.5	0.1	0.8	0.4
Jan	1.2	1.6	0.1	0.4	0.0
Jan-Aug 2011	3.2	2.4	0.0	3.0	0.8
Jan-Aug 2011 A	4.9	3.1	0.0	4.6	1.2

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

Percentage change month to month seasonally adjusted

Source: http://www.bea.gov/newsreleases/national/pi/2011/pdf/pi0811.pdf

Personal income and its disposition are shown in Table E2 (abridged here from the text). An important adversity is shown in Table E2 in the form of sharp deceleration in growth of personal income from $155.3 billion in Jan 2011 relative to Dec 2010 to contraction by $7.3 billion in Aug relative to Jul. In the same period, growth of wages and salaries fell from $55 billion in Jan/Dec to contraction by $11.8 billion in Aug/Jul.

Table E2, US, Personal Income and its Disposition, Seasonally Adjusted at Annual Rates $ Billions

	Personal Income	Wages & Salaries	Personal Taxes	DPI	Savings Rate %
Aug	13,028.3	6,677.0	1,409.3	11,619.0	4.5
Jul	13,035,6	6,688.8	1,411.6	11,624.0	4.7
Change Aug/Jul	-7.3	-11.8	-2.3	-5.0

Source: http://www.bea.gov/newsreleases/national/pi/2011/pdf/pi0811.pdf

Chart 9 (anticipated here from the text) 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 29.6 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

I United States Growth Standstill. Real GDP grew at the seasonally-adjusted annual equivalent rate of 0.4 percent in the first quarter of 2011, IQ2011, and at 1.3 percent in IIQ2011. Discounting 0.4 percent to one quarter is 0.1 percent and discounting 1.3 percent is 0.32 percent. Real GDP growth in the first half of the 2011 accumulated to 0.42 percent (1.001 x 1.0032), which is equal to 0.8 percent (compounding 1.0042 for two successive half years). The US economy is close to a standstill. The Bureau of Economic Analysis (BEA) of the US Department of Commerce released on Thu Sep 29 the third estimate of GDP for IIQ2011 that was revised upwardly to 1.3 percent from the earlier second estimate of 1.0 percent with less information released on Aug 26. The objective of this section is analyzing US economic growth. There is initial brief discussion of the concept of slow-growth recession followed by comparison of the current growth experience of the US with earlier expansions after past deep contractions and consideration of the quarterly performance in the first half of 2011.

The concept of growth recession was popular during the stagflation from the late 1960s to the early 1980s. The economy of the US underperformed with several recession episodes in “stop and go” fashion of economic activity while the rate of inflation rose to the highest in a peacetime period (see http://cmpassocregulationblog.blogspot.com/2011/06/risk-aversion-and-stagflation.html http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/05/global-inflation-seigniorage-monetary.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html). A growth recession could be defined as a period in which economic growth is insufficient to move the economy toward full employment of humans, equipment and other productive resources. The US is experiencing a dramatic slow growth recession with 29.9 million people in job stress, consisting of an effective number of unemployed of 18.5 million, 8.7 million employed part-time because they cannot find full employment and 2.7 million marginally attached to the labor force (see Table 3 in http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html). The discussion of the growth recession issue in the 1970s by two recognized economists of the twentieth century, James Tobin and Paul A. Samuelson, is worth recalling.

In analysis of the design of monetary policy in 1974, Tobin (1974, 219) finds that the forecast of the President’s Council of Economic Advisers (CEA) was also the target such that monetary policy would have to be designed and implemented to attain that target. The concern was with maintaining full employment as provided in the Employment Law of 1946 (http://www.law.cornell.edu/uscode/15/1021.html http://uscode.house.gov/download/pls/15C21.txt http://www.eric.ed.gov/PDFS/ED164974.pdf) see http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html), which also created the CEA. Tobin (1974, 219) describes the forecast/target of the CEA for 1974:

“The expected and approved path appears to be quarter-to-quarter rates of growth of real gross national product in 1974 of roughly -0.5, 0.1, and 1 percent, with unemployment rising to about 5.6 percent in the second quarter and remaining there the rest of the year. The rate of price inflation would fall shortly in the second quarter, but rise slightly toward the end of the year.”

Referring to monetary policy design, Tobin (1974, 221) states: “if interest rates remain stable or rise during the current (growth) recession and recovery, this will be a unique episode in business cycle annals.” Subpar economic growth is often called a “growth recession.” The critically important concept is that economic growth is not sufficient to move the economy toward full employment, creating the social and economic adverse outcome of idle capacity and unemployed and underemployed workers, much the same as currently.

The unexpected incidence of inflation surprises during growth recessions is considered by Samuelson (1974, 76):

“Indeed, if there were in Las Vegas or New York a continuous casino on the money GNP of 1974’s fourth quarter, it would be absurd to think that the best economic forecasters could improve upon the guess posted there. Whatever knowledge and analytical skill they possess would already have been fed into the bidding. It is a manifest contradiction to think that most economists can be expected to do better than their own best performance. I am saying that the best forecasters have been poor in predicting the general price level’s movements and level even a year ahead. By Valentine’s Day 1973 the best forecasters were beginning to talk of the growth recession that we now know did set in at the end of the first quarter. Aside from their end-of-1972 forecasts, the fashionable crowd has little to blame itself for when it comes to their 1973 real GNP projections. But, of course, they did not foresee the upward surge of food and decontrolled industrial prices. This has been a recurring pattern: surprise during the event at the virulence of inflation, wisdom after the event in demonstrating that it did, after all, fit with past patterns of experience.”

Economists are known for their forecasts being second only to those of astrologers. Accurate forecasts are typically realized for the wrong reasons. In contrast with meteorologists, economists do not even agree on what happened. There is not even agreement on what caused the global recession and why the economy has reached a perilous standstill.

Historical parallels are instructive but have all the limitations of empirical research in economics. The more instructive comparisons are not with the Great Depression of the 1930s but rather with the recessions in the 1950s, 1970s and 1980s. The growth rates and job creation in the expansion of the economy away from recession are subpar in the current expansion compared to others in the past. Four recessions are initially considered, following the reference dates of the National Bureau of Economic Research (NBER) (http://www.nber.org/cycles/cyclesmain.html ): IIQ1953-IIQ1954, IIIQ1957-IIQ1958, IIIQ1973-IQ1975 and IQ1980-IIIQ1980. The data for the earlier contractions illustrate that the growth rate and job creation in the current expansion are inferior. The sharp contractions of the 1950s and 1970s are considered in Table 1, showing the Bureau of Economic Analysis (BEA) quarter-to-quarter, seasonally adjusted (SA), yearly-equivalent growth rates of GDP. The recovery from the recession of 1953 consisted of four consecutive quarters of high percentage growth rates from IIIQ1954 to IIIQ1955: 4.6, 8.3, 12.0, 6.8 and 5.4. The recession of 1957 was followed by four consecutive high percentage growth rates from IIIQ1958 to IIQ1959: 9.7, 9.7, 8.3 and 10.5. The recession of 1973-1975 was followed by high percentage growth rates from IIQ1975 to IIQ1976: 6.9, 5.3, 9.4 and 3.0. The disaster of the Great Inflation and Unemployment of the 1970, which made stagflation notorious, is even better in growth rates during the expansion phase from contractions in comparison than the current slow-growth recession.

Table 1, US, Quarterly Growth Rates of GDP, % Annual Equivalent SA

	IQ	IIQ	IIIQ	IVQ
1953	7.7	3.1	-2.4	-6.2
1954	-1.9	0.5	4.6	8.3
1955	12.0	6.8	5.4	2.3
1957	2.5	-1.0	3.9	-4.1
1958	-10.4	2.5	9.7	9.7
1959	8.3	10.5	-0.5	1.4
1973	10.6	4.7	-2.1/	3.9
1974	3.5	1.0	-3.9	6.9
1975	-4.8	3.1	6.9	5.3
1976	9.4	3.0	2.0	2.9
1979	0.7	0.4	2.9	1.1
1980	1.3	-7.9	-0.7	7.6

Source: http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=1&Freq=Qtr&FirstYear=2008&LastYear=2010

The NBER dates another recession in 1980 that lasted about half a year. If the two recessions from IQ1980s to IIIQ1980 and IIIQ1981 to IVQ1982 are combined, the impact of lost GDP of 4.8 percent is more comparable to the latest revised 5.1 percent drop of the recession from IVQ2007 to IIQ2009. The recession in 1981-1982 is quite similar on its own to the 2007-2009 recession. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.5 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). Table 2 provides the Bureau of Economic Analysis (BEA) quarterly growth rates of GDP in SA yearly equivalents for the recessions of 1981-1982 and 2007 to 2009, using the latest major revision published on Jul 29, 2011 (http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_adv.pdf) and the second estimate of IIQ2011 released on Aug 26, 2011 (http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_2nd.pdf). There were four quarters of contraction in 1981-1982 ranging in rate from -1.5 percent to -6.4 percent and five quarters of contraction in 2007-2009 ranging in rate from -0.7 percent to -8.9 percent. The striking difference is that in the first eight quarters of expansion from IQ1983 to IIIQ1984, shown in Table 2 in relief, GDP grew at the high quarterly percentage growth rates of 5.1, 9.3, 8.1, 8.5, 7.1, 3.9, 3.3 and 5.4 while the percentage growth rates in the first eight quarters from IIIQ2009 to IQ2011, shown in relief in Table 2, was mediocre: 1.7, 3.8, 3.9, 3.8, 2.5, 2.3, 0.4 and 1.3. Asterisks denote the estimates that have been revised by the BEA. During half a year GDP has been growing at annual equivalent rates of 0.4 percent in IQ2011 and 1.3 percent in IIQ2011 in what can be considered as a slow growth recession because of the 29.9 million in job stress. Inventory change contributed to initial growth but was rapidly replaced by growth in investment and demand in 1983.

Table 2, US, Quarterly Growth Rates of GDP, % Annual Equivalent SA

Q	1981	1982	1983	1984	2008	2009	2010
I	8.6	-6.4	5.1	7.1	-1.8*	-6.7*	3.9*
II	-3.2	2.2	9.3	3.9	1.3*	-0.7	3.8*
III	4.9	-1.5	8.1	3.3	-3.7*	1.7	2.5*
IV	-4.9	0.3	8.5	5.4	-8.9*	3.8*	2.3*
				1985			2011
I				3.8			0.4
II				3.4			1.3
III				6.4
IV				3.1

Source: http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_3rd.pdf

The approach of Lucas (2011May19) is to evaluate the performance of the economy in terms of policies required for recovery but without neglect of efficiency in the use of productive resources and growth in long-term productive capacity. Business cycles could be analyzed as departures from a strong long-term trend of growth. Lucas (2011May19, 5) finds that real income per capita in the US multiplied by a factor of 12 between 1870 and 2010. Output in the US grows at a rate of 3 percent per year in the long-run and output per person at the rate of 2 percent. Business cycles can be measured as deviations from this long-term trend. Lucas (2011May 19, 7) provides the rates of growth of eight economies (US, UK, France, Germany, Canada, Italy, Spain and Japan) since 1870, showing that relative growth rates accelerated in countries starting from lower income levels until about the 1970s. The rate of growth of rich economies has continued at about 2 per cent per year but the income gap has stabilized. Different national policies could explain the slower reduction of income gaps. US GDP fell 30 percent below trend by 1933 and is currently about 10 percent below trend, as measured by Lucas (2011May19, 16).

Chart 1 provides the strong growth of real quarterly GDP in the US between 1947 and 1999. There is an evident acceleration of the rate of GDP growth in the 1990s as shown by a much sharper slope of the growth curve. Cobet and Wilson (2002) define labor productivity as the value of manufacturing output produced per unit of labor input used (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). Between 1950 and 2000, labor productivity in the US grew less rapidly than in Germany and Japan. The major part of the increase in productivity in Germany and Japan occurred between 1950 and 1973 while the rate of productivity growth in the US was relatively subdued in several periods. While Germany and Japan reached their highest growth rates of productivity before 1973, the US accelerated its rate of productivity growth in the second half of the 1990s. Between 1950 and 2000, the rate of productivity growth in the US of 2.9 percent per year was much lower than 6.3 percent in Japan and 4.7 percent in Germany. Between 1995 and 2000, the rate of productivity growth of the US of 4.6 percent exceeded that of Japan of 3.9 percent and the rate of Germany of 2.6 percent.

Chart 1, US, Real GDP 1947-1999

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

Chart 2 provides the growth of real quarterly GDP in the US between 1979 an 2010. The drop of output in the recession from IVQ2007 to IIQ2009 has been followed by anemic recovery and a standstill that can lead to growth recession, or low rates of economic growth, but perhaps even another contraction or conventional recession.

Chart 2, US, Real GDP 1970-2010

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

Characteristics of the four cyclical contractions are provided in Table 3 with the first column showing the number of quarters of contraction, the second column the cumulative percentage contraction and the final column the average quarterly rate of contraction in annual equivalent rate. There were two contractions from IQ1980 to IIIQ1980 and IIIQ1981 to IVQ1982 separated by three quarters of expansion. The drop of output combining the declines in these two contractions is 4.8 percent, which is almost equal to the decline of 5.1 percent in the contraction from IVQ2007 to IIQ2009. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.5 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). The comparison of the global recession after 2007 with the Great Depression is entirely misleading.

Table 3, US, Number of Quarters, Cumulative Percentage Contraction and Average Percentage Annual Equivalent Rate in Cyclical Contractions

	Number of Quarters	Cumulative Percentage Contraction	Average Percentage Annual Equivalent Rate
IIQ1953 to IIQ1954	4	-2.5	-0.63
IIIQ1957 to IIQ1958	3	-3.1	-9.0
IQ1980 to IIIQ1980	2	-2.2	-1.1
IIIQ1981 to IVQ1982	4	-2.7	-0.67
IVQ2007 to IIQ2009	6	-5.1	-0.87

Source: Business Cycle Reference Dates: http://www.nber.org/cycles/cyclesmain.html

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

Table 4 shows the extraordinary contrast between the mediocre average annual equivalent growth rate of 2.4 percent of the US economy in the eight quarters of the current cyclical expansion and the average of 6.2 percent in the four earlier cyclical expansions. The BEA data for the two quarters of 2011 show the economy in standstill with annual equivalent growth of 0.7 percent. The expansion of IQ1983 to IV1985 was at the average annual growth rate of 5.7 percent.

Table 4, US, Number of Quarters, Cumulative Growth and Average Annual Equivalent Growth Rate in Cyclical Expansions

	Number of Quarters	Cumulative Growth ∆%	Average Annual Equivalent Growth Rate
IIIQ 1954 to IQ1957	11	12.6	4.4
IIQ1958 to IIQ1959	5	10.2	8.1
IIQ1975 to IVQ1976	8	9.5	4.6
IQ1983 to IV1985	13	19.6	5.7
Average Four Above Expansions			6.2
IIIQ2009 to IIQ2011	8	4.9	2.4

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

Chart 3 shows US real quarterly GDP growth from 1980 to 1989. The economy contracted during the recession and then expanded vigorously throughout the 1980s, rapidly eliminating the unemployment caused by the contraction.

Chart 3, US, Real GDP, 1980-1989

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

Chart 4 shows the entirely different situation of the real quarterly GDP in the US between 2007 and 2011. The economy has underperformed during the first eight quarters of expansion for the first time in the comparable contractions since the 1950s. The US economy now is in a dangerous standstill.

Chart 4, US, Real GDP, 2007-2011

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

As shown in Tables 3 and 4 above the loss of real GDP in the US during the contraction was 5.1 percent but the gain in the cyclical expansion has been only 4.9 percent (last row in Table 4). As a result, the level of real GDP in IIQ2011 with the third estimate is lower by 0.4 percent than the level of real GDP in IVQ2007. Table 5 provides in the second column real GDP in billions of chained 2005 dollars. The third column provides the percentage change of the quarter relative to IVQ2007; the fourth column provides the percentage change relative to the prior quarter; and the final fifth column provides the percentage change relative to the same quarter a year earlier. The contraction actually concentrated in two quarters: decline of 2.3 percent in IVQ2008 relative to the prior quarter and decline of 1.7 percent in IQ2009 relative to IVQ2008. The combined fall of GDP in IVQ2008 and IQ2009 was 4 percent (1.023 x 1.017). Those two quarters coincided with the worst effects of the financial crisis. GDP fell 0.2 percent in IIQ2009 but grew 0.4 percent in IIIQ2009, which is the beginning of recovery in the cyclical dates of the NBER. Most of the recovery occurred in three successive quarters from IVQ2009 to IIQ2010 of equal growth at 0.9 percent for cumulative growth in those three quarters of 2.7 percent. The economy lost momentum already in IIIQ2010 and IVQ2010 growing at 0.6 percent in each quarter. The economy then stalled during the first half of 2011 with growth of 0.1 percent in IQ2011 and 0.33 percent in IIQ2011. Growth in a quarter relative to a year earlier in Table 5 slows from over 3 percent during three consecutive quarters from IIQ2010 to IVQ2010 to 2.2 percent in IQ2011 and 1.6 percent in IIQ2011. The revision of the seasonally adjusted annual rate in IIQ2011 from 1.0 percent to 1.3 percent merely increases growth in IIQ2011 relative to IQ2011 from 0.25 percent to 0.33 percent. Growth in IIQ2011 relative to IIQ2011 remains at the mediocre rate of 1.6 percent. The critical question for which there is not yet definitive solution is whether what lies ahead is growth recession with the economy crawling and unemployment/underemployment at extremely high levels or another contraction. Forecasts of various sources continued to maintain high growth in the second half of 2011 without taking into consideration the continuous slowing of the economy in late 2010 and the first half of 2011.

Table 5, US, Real GDP and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions Chained 2005 Dollars and ∆%

	Real GDP, Billions Chained 2005 Dollars	∆% Relative to IVQ2007	∆% Relative to Prior Quarter	∆% over Year Earlier
IVQ2007	13,326.0	NA	NA	2.2
IQ2008	13,266.8	-0.4	-0.4	1.6
IIQ2008	13,310.5	-0.1	0.3	1.0
IIIQ2008	13,186.9	-1.0	-0.9	-0.6
IVQ2008	12,883.5	-3.3	-2.3	-3.3
IQ2009	12,663.2	-4.9	-1.7	-4.5
IIQ2009	12,641.3	-5.1	-0.2	-5.0
IIIQ2009	12,694.5	-4.7	0.4	-3.7
IV2009	12,813.5	-3.8	0.9	-0.5
IQ2010	12,937.7	-2.9	0.9	2.2
IIQ2010	13,058.5	-1.8	0.9	3.3
IIIQ2010	13,139.6	-1.4	0.6	3.5
IVQ2010	13,216.1	-0.8	0.6	3.1
IQ2011	13,227.9	-0.7	0.1	2.2
IIQ2011	13,271.8	-0.4	0.33	1.6

Source: http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

Some common explanations for the current slump are not valid. Negative effects of weak housing currently are inferior compared with negative exports in the 1980s that gave the pejorative name of “rust belt” to the US industrial corridor. Growth originates in aggregate demand consisting of investment and consumption. Taylor (2011Jul21) finds that real GDP growth currently is 60 to 70 percent lower than in the recovery of the 1980s, which is also the case of consumption and investment. Another common misperception is that there has been a systemic financial crisis with many ignoring the debt crisis of 1982 when US money-center banks had more than 40 percent of their capital in loans to emerging countries in default or near default. Several countries that had borrowed for financing balance of payments deficits declared moratoriums on their foreign debts, impairing balance sheets of money-center banks (see, for example, in vast literature, Krugman 1994, Pelaez 1986, 1987). The increase in interest rates to deal with stagflation caught the banking industry with short-dated funding and long-term fixed-rate assets. In a parallel of what could happen when monetary policy abandons its near zero interest rates, 1150 US commercial banks, close to 8 percent of the industry, failed, almost twice the number of banks that failed since establishment of the FDIC in 1934 until 1983 (Benston and Kaufman 1997, 139; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 72-7). More than 900 savings and loans associations, equivalent to around 25 percent of the industry, had to be closed, merged or placed in conservatorship (Ibid). Taxpayer funds in the value of $150 billion were used in the resolution of failed savings and loans institutions. In terms of relative dimensions, $150 billion was equivalent to 2.6 percent of GDP of $5800 billion in 1990 and 3.6 percent of GDP of $4217 billion in 1985 (http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=5&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=1980&LastYear=1990&3Place=N&Update=Update&JavaBox=no). The equivalent in terms of 2.6 to 3.6 percent of US GDP in 2010 of $14,657 billion would be $381 billion to $528 billion (data from Ibid). Wide swings in interest rates resulting from aggressive monetary policy can wreck the balance sheets of families, financial institutions and companies while posing another recession risk. While it is true that monetary policy can increase interest rates instantaneously, the increase from zero percent toward much higher levels to contain inflation can have devastating effects on the world economy.

The revised estimates and earlier estimates from IQ2008 to IQ2011 in seasonally adjusted annual equivalent rates are shown in Table 6. The strongest revision is for IVQ2008 for which the contraction of GDP is revised from minus 6.8 percent to minus 8.9 percent. IQ2009 is also revised from contraction of minus 4.9 percent to minus 6.7 percent. There is only minor revision in IIIQ2008 of the contraction of minus 4.0 percent to minus 3.7 percent. Growth of 5.0 percent in IV2009 is revised to 3.8 percent but growth in IIQ2010 is upwardly revised to 3.8 percent. The revisions do not alter the conclusion that the current expansion is much weaker than historical sharp contractions since the 1950s and is now changing into slow growth recession or even possibly contraction.

Table 6, US, Quarterly Growth Rates of GDP, % Annual Equivalent SA, Revised and Earlier Estimates

Quarters	Revised Estimate	Earlier Estimate
2008
I	-1.8	-0.7
II	1.3	0.6
III	-3.7	-4.0
IV	-8.9	-6.8
2009
I	-6.7	-4.9
II	-0.7	-0.7
III	1.7	1.6
IV	3.8	5.0
2010
I	3.9	3.7
II	3.8	1.7
III	2.5	2.6
IV	2.3	3.1
2011
I	0.4	1.9

Source: http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_adv.pdf

The contributions to the rate of growth of GDP in percentage points (PP) are provided in Table 7. Aggregate demand, personal consumption expenditures (PCE) and gross private domestic investment (GDI) were much stronger during the expansion phase in IQ1983 to IIQ1984 than in IIIQ2009 to IIQ2011. In an article for the WSJ, Feldstein (2011Jun8) argues that US economic growth will be subpar in the best conditions with continuing high levels of unemployment and underemployment. Feldstein (2011Jun8) analyzes the decline in the rate of growth of GDP from 3.2 percent in IVQ2010 (fourth quarter of 2010) to 1.8 percent in IQ2011, with data different than in Table 7 because they were based on the first estimate before the revision. Table 7 shows that the decomposition of the rate of growth of GDP of 0.4 percent in IQ2011, which now attributes 0.32 percentage points to change in inventories (see http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html). GDP data are seasonally-adjusted quarterly growth rates expressed in annual equivalent. The argument by Feldstein (2011Jun8) is that growth of final sales after deducting inventory change from then estimated 1.8 percent GDP growth was only 0.6 percent, which is equivalent to growth of only 0.15 percent in the quarter ((1.006)^1/4 or 0.6 percent discounted four quarterly periods). This argument was still valid with the third estimate of GDP growth of 1.9 percent in IQ2011 and of contribution of 1.31 PP by inventory change. The economy stalled with the new data: deducting 0.32 percentage points in inventory change from growth of 0.4 percent leaves only 0.08 percent growth, or virtually zero. Inventory accumulation cannot sustain economic growth that requires increasing demand in investment and consumption. Business only invests when sales increase. Consumers need to see their income growing and the evidence is that real disposable income stagnated in the first eight months of 2011 with cumulative growth of 0.0 percent or 0.0 percent at annual equivalent rate, as shown below in Table 12 in the following section. (see Table 3 in http://cmpassocregulationblog.blogspot.com/2011/08/global-growth-recession-25-to-30.html) (http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html). Real wages are falling, 40 million people struggle with food stamps (http://www.fns.usda.gov/pd/34SNAPmonthly.htm), hiring has collapsed and between 25 and 30 million people are unemployed or underemployed. Feldstein (2011Jun8) also finds significant weakness in short-term economic indicators, which are analyzed in this blog weekly. The arguments by Feldstein in Jun turned to be prophetic in that the estimate of GDP growth in IQ2011 is revised to 0.4 percent with the economy stalled in an evident slow-growth recession with only 1.3 percent growth in IIQ2011 and annual equivalent in the first half of 0.8 percent.

Table 7, US, Contributions to the Rate of Growth of GDP in Percentage Points

	GDP	PCE	GDI	∆ PI	Trade	GOV
2011
I	0.4	1.47	0.47	0.32	-0.34	-1.23
II	1.3	0.49	0.79	-0.23	0.24	-0.18
2010
I	3.9	1.92	3.25	2.64	-0.97	-0.26
II	3.8	2.05	2.92	0.82	-1.94	0.77
III	2.5	1.85	1.14	1.61	-0.68	0.20
IV	2.3	2.48	-0.91	-3.42	1.37	-0.58
2009
I	-6.7	-1.02	-7.76	-2.66	2.44	-0.33
II	-0.7	-1.28	-2.84	-0.58	2.21	1.21
III	1.7	1.66	0.35	0.21	-0.59	0.28
IV	3.8	0.33	3.51	3.93	0.15	-0.18
1982
I	-6.4	1.62	-7.50	-5.47	-0.49	-0.03
II	-2.2	0.90	-0.05	2.35	0.84	0.50
III	-1.5	1.92	-0.72	1.15	-3.31	0.57
IV	0.3	4.64	-5.66	-5.48	-0.10	1.44
1983
I	5.1	2.54	2.20	0.94	-0.30	0.63
II	9.3	5.22	5.87	3.51	-2.54	0.75
III	8.1	4.66	4.30	0.60	-2.32	1.48
IV	8.5	4.20	6.84	3.09	-1.17	-1.35
1984
I	8.0	2.35	7.15	5.07	-2.37	0.86
II	7.1	3.75	2.44	-0.30	-0.89	1.79
III	3.9	2.02	-0.89	0.21	-0.36	0.62
IV	3.3	3.38	1.79	-2.50	-0.58	1.75
1985
I	3.8	4.34	-2.38	-2.94	0.91	0.95

Note: PCE: personal consumption expenditures; GDI: gross private domestic investment; ∆ PI: change in private inventories; Trade: net exports of goods and services; GOV: government consumption expenditures and gross investment; – is negative and no sign positive

GDP: percent change at annual rate; percentage points at annual rates

Source: http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_3rd.pdf

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=2&FirstYear=2009&LastYear=2010&Freq=Qtr

Table 8 provides more detailed information on the causes of the deceleration of GDP growth from 2.3 percent in IVQ2010 to 0.4 percent in IQ2011. The estimates incorporate the revisions of Jul 29, 2011, Aug 26 and Sep 28, 2011. The BEA finds three source of contribution to GDP growth in IQ2011: (1) growth of PCE by 2.1 percent; (2) growth of exports by 7.9 percent; (3) positive contribution of private inventory investment of 0.32 PP; and (4) growth of nonresidential fixed investment (NRFI) by 2.1 percent. The factors that contributed to reduction of growth in IQ2011 were: (1) decline in residential fixed investment by 2.4 percent; (2) increase of imports by 8.3 percent, which are a deduction to GDP growth; and (3) contraction of federal and state/local government or combined government (GOV) by 5.9 percent. There are three sources causing deceleration of growth: (1) deceleration of nonresidential fixed investment (NRFI) from 8.7 percent to 2.1 percent; (2) deceleration of PCE growth from 3.6 percent in IVQ2010 to 2.1 percent in IQ2011 (with durable goods growth declining from 17.2 percent in IVQ2010 to 11.7 percent in IQ2011; (3) change of growth of 2.5 percent of RFI in IVQ2010 to minus 2.4 percent in IQ2011; (4) acceleration of decline of government consumption and expenditures (GOV) from minus 2.8 percent to minus 5.9 percent with federal government consumption and expenditures decelerating from minus 3.0 percent to minus 9.4 percent, caused by decline in defense expenditures by -11.7 percent, and state/local from minus 2.7 percent to minus 3.4 percent.

Table 8, US, Percentage Seasonally Adjusted Annual Equivalent Quarterly Rates of Increase, %

	IVQ2010	IQ2011
GDP	2.3	0.4
PCE	3.6	2.1
Durable Goods	17.2	11.7
NRFI	8.7	2.1
RFI	2.5	-2.4
Exports	7.8	7.9
Imports	-2.3	8.3
GOV	-2.8	-5.9
Federal GOV	-3.0	-9.4
State/Local GOV	-2.7	-3.4
∆ PI (PP)	-1.79	0.32
Gross Domestic Purchases	0.9	0.7
Prices Gross Domestic Purchases	2.1	4.0
Prices of GDP	1.9	2.5
Prices of GDP Excluding Food and Energy	1.3	2.5
Prices of PCE	1.9	3.9
Prices of PCE Excluding Food and Energy	0.7	1.6
Prices of Market Based PCE	1.8	4.0
Prices of Market Based PCE Excluding Food and Energy	0.3	1.3
Real Disposable Personal Income*	3.5	2.6
Personal Savings As % Disposable Income	5.2	5.0

Note: PCE: personal consumption expenditures; NRFI: nonresidential fixed investment; RFI: residential fixed investment; GOV: government consumption expenditures and gross investment; ∆ PI: change in

private inventories; GDP - ∆ PI: final sales of domestic product; PP: percentage points; Personal savings rate: savings as percent of disposable income

*Percent change from quarter one year ago

Source: http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_3rd.pdf

According to the BEA, the positive contributions to GDP growth in IIQ2011, shown in Table 9, are: (1) growth of exports of 3.6 percent; (2) growth of NRFI of 10.3 percent; and (3) growth of 1.9 percent of federal government spending. Offsetting factors of GDP growth are (1) negative growth of 2.8 percent of state and local government spending; and (2) growth of imports of 1.9 percent, which is a deduction from GDP growth. PCE, which is equivalent to about 71 percent of GDP (http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1), stalled with growth of only 0.7 percent in seasonally-adjusted annual equivalent rate, which is 0.17 percent relative to the prior quarter. Real final sales of domestic product, which is equivalent to GDP growth less change in private inventories, is only 1.2 percent in IIQ2011 that is still in slow-growth recession range even if better than 0.0 percent in IQ2011. Current-dollar GDP, which the BEA defines as the market value of US output of goods and services, rose to a seasonally-adjusted annual level of $15,012.8 billion in IIQ2011. Without adjustment for inflation, current-dollar GDP rose 4.0 percent in IIQ2011 or $145.0 billion compared with an increase of 3.1 percent in IQ2011, or $112.8 billion. Expenditure programs in the hundreds of billions of dollars should take into account their oversized magnitude relative to the meager current increase in economic activity.

Table 9, US, Percentage Seasonally Adjusted Annual Equivalent Quarterly Rates of Increase, %

	IQ2011	IIQ2011
GDP	0.4	1.3
PCE	2.1	0.7
Durable Goods	11.7	-5.3
NRFI	2.1	10.3
RFI	-2.4	4.2
Exports	7.9	3.6
Imports	8.3	1.9
GOV	-5.9	-0.9
Federal GOV	-9.4	1.9
State/Local GOV	-3.4	-2.8
∆ PI (PP)	0.32	-0.23
Real Final Sales of Domestic Product GDP less∆ PI	0.0	1.2
Real Gross Domestic Purchases	0.7	1.0
Prices Gross Domestic Purchases	4.0	3.3
Prices of GDP	2.5	2.5
Prices of GDP Excluding Food and Energy	2.5	2.7
Prices of PCE	3.9	3.3
Prices of PCE Excluding Food and Energy	1.6	2.3
Prices of Market Based PCE	4.0	3.5
Prices of Market Based PCE Excluding Food and Energy	1.3	2.4
Real Disposable Personal Income*	2.6	1.4
Personal Savings As % Disposable Income	5.0	5.1

private inventories; GDP - ∆ PI: final sales of domestic product; PP: percentage points; Personal savings rate: savings as percent of disposable income

*Percent change from same quarter one year ago

Source:

http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_3rd.pdf

Percentage shares of GDP are shown in Table 10. PCE is equivalent to 70.6 percent of GDP and is growing at very low levels with stagnation of real disposable income, high levels of unemployment and underemployment and higher savings rates. Gross private domestic investment is also growing slowly even with about two trillions of dollars in cash holdings by companies. In a slowing world economy, it may prove more difficult to grow exports faster than imports to generate higher growth.

Table 10, US, Percentage Shares of GDP, %

	IVQ2010
GDP	100.0
PCE	70.6
Goods	23.6
Services	47.0
Gross Private Domestic Investment	12.3
Fixed Investment	12.1
NRFI	9.8
RFI	2.2
Change in Private Inventories	0.3
Net Exports of Goods and Services	-3.4
Exports	13.1
Imports	16.5
Government	20.5
Federal	8.4
State and Local	12.1

PCE: personal consumption expenditures; NRFI: nonresidential fixed investment; RFI: residential fixed investment

Source: http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

Table 11 shows the percentage point (PP) contributions to the annual levels of GDP growth in the earlier recessions 1958-1959, 1975-1976, 1982-1983 and 2009 and 2010. The data incorporate the new revisions released by the BEA on Jul 29, 2011. The most striking contrast is in the rates of growth of annual GDP in the expansion phases of 7.2 percent in 1959, 4.5 percent in 1983 followed by 7.2 percent in 1984 and 4.1 percent in 1985 but only 3.0 percent in 2010 after six consecutive quarters of growth. The annual levels also show much stronger growth of PCEs in the expansions after the earlier contractions. PCEs contributed 1.44 PPs to GDP growth in 2010 of which 0.99 PP in goods and 0.46 PP in services. GDI deducted 3.61 PPs of GDP growth in 2009 of which -2.77 PPs by fixed investment and -0.84 PP of ∆PI and added 1.96 PPs to GDI in 2010 of which 0.48 PPs of fixed investment and 1.64 PPs of ∆PI. Trade, or exports of goods and services net of imports, contributed 1.11 PPs in 2009 of which exports deducted 1.18 PPs and imports added 2.29 PPs. In 2010, trade deducted 0.51 PP with exports contributing 1.31 PPs and imports deducting 1.82 PPs. In 2009, Government added 0.34 PP of which 0.45 PP by the federal government and -0.11 PP by state and local government; in 2010, government added 0.14 PP of which 0.37 PP by the federal government with state and local government deducting 0.23 PP.

Table 11, US, Percentage Point Contributions to the Annual Growth Rate of GDP

	GDP	PCE	GDI	∆ PI	Trade	GOV
1958	-0.9	0.54	-1.25	-0.18	-0.89	0.70
1959	7.2	3.61	2.80	0.86	0.00	0.76
1975	-0.2	1.40	-2.98	-1.27	0.89	0.48
1976	5.4	3.51	2.84	1.41	-1.08	0.10
1982	-1.9	0.86	-2.55	-1.34	-0.60	0.35
1983	4.5	3.65	-1.45	0.29	-1.35	0.76
1984	7.2	3.43	4.63	1.95	-1.58	0.70
1985	4.1	3.32	-0.17	-1.06	-0.42	1.41
2009	-3.5	-1.32	-3.61	-0.84	1.11	-0.09
2010	3.0	1.44	1.96	1.64	-0.51	0.14

Source:

http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_adv.pdf

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.bea.gov/newsreleases/national/gdp/2011/pdf/gdp4q10_3rd.pdf

II Stagnant Personal Income and Consumption. The data on personal income and consumption have been revised back to 2003 as it the case of the national accounts (GDP revisions are covered in http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html). All revisions are incorporated in this subsection. There are two types of very valuable information on income, consumption and prices in Table 12, showing monthly, and annual equivalent percentage changes, seasonally adjusted, of current dollars or nominal personal income (NPI), current dollars or nominal disposable personal income (NDPI), real or constant chained (2005) dollars DPI (RDPI), current dollars nominal personal consumption expenditures (NPCE) and constant or chained (2005) dollars PCE.

First, the data in Table 12 reveal the weakness of the economy. The column RDPI (real disposable income) shows that after eight months in 2011 in Jan-Aug growth of RDPI has accumulated to 0.0 percent. Growth of real personal consumption expenditures accumulated to 0.8 percent in Jan-Aug, which is equivalent to yearly growth of 1.2 percent. Inflation creates the illusion that there has been growth of income, when in fact RDPI stagnated, and growth of consumption, which in fact has grown at the mediocre annual rate of 1.2 percent. The growth engine of the US economy has stalled with resulting adverse effects on job creation and opportunities for advancement.

Table 12, US, Percentage Change from Prior Month Seasonally Adjusted of Personal Income, Disposable Income and Personal Consumption Expenditures %

	NPI	NDPI	RDPI	NPCE	RPCE
2011
Aug	-0.1	0.0	-0.3	0.2	0.0
Jul	0.1	0.1	-0.2	0.7	0.4
Jun	0.2	0.1	0.3	-0.2	-0.1
May	0.3	0.2	0.0	0.2	0.0
Apr	0.4	0.3	0.0	0.3	-0.1
Mar	0.5	0.4	0.0	0.6	0.2
Feb	0.6	0.5	0.1	0.8	0.4
Jan	1.2	1.6	0.1	0.4	0.0
Jan-Aug 2011	3.2	2.4	0.0	3.0	0.8
Jan-Aug 2011 A	4.9	3.1	0.0	4.6	1.2
2010
Dec	0.5	0.5	0.2	0.4	0.1
Nov	0.1	0.1	0.0	0.4	0.3
Oct	0.5	0.5	0.3	0.6	0.4
IVQ10	1.1	1.1	0.5	1.4	0.8
IVQ010 A	4.5	4.5	2.0	5.7	3.2

Percentage change month to month seasonally adjusted

Source: http://www.bea.gov/newsreleases/national/pi/2011/pdf/pi0811.pdf

Second, the difference between NDPI and RDPI (NDPI/RDPI) and NPCE and RPCE (NPCE/RPCE) indicates inflation. Let the rate of inflation be π, the percentage change in nominal value NV and the change in real value rv. Then:

(1+π)(1+rv) = (1+NV) (1)

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

(1+π) = (1+NV)/(1+rv) (2)

The growing gap between NDPI/RDPI and NPCE/RPCE is inflation and accelerating from the final quarter of 2010 to the first seven months of 2011 but at slower rate since the drop in commodity prices beginning in May. The gap becomes more evident in the cumulative percentages Jan-Aug 2011 and IVQ2010 and their annual equivalents Jan-Aug 2011 AE and IVQ2010 AE. The gap of NDPI/RDPI in Jan-Aug 2011 in Table 12 is 2.4 percent (1.024/1.000), which is much higher than in IVQ2010 of 2.5 percent (1.045/1.02). The gap NPCE/RPCE in Jan-Aug 2011 in Table 12 is 3.4 percent (1.046/1.012), which is much higher than 2.4 percent (1.057/1.032) in IVQ2010. Inflation in the deflator of personal income and outlays is moving toward 3 percent per year. That is, the government is benefitting from a tax known as the inflation tax. By issuing money through its central bank the government buys goods and services. In a situation of sizeable deficits and inflation, the government gains by purchasing before effects of issuing money that causes increases in prices (see http://cmpassocregulationblog.blogspot.com/2011/05/global-inflation-seigniorage-monetary.html http://cmpassocregulationblog.blogspot.com/2011/05/global-inflation-seigniorage-financial.html Pelaez and Pelaez, International Financial Architecture (2005), 201-12). This is a hidden but actually felt contribution of monetary accommodation to financing bloated government expenditures. The new inflation tax argument is not by increases in inflation resulting from increasing monetary aggregates but by the rise in valuations of assets such as commodities induced through the carry trade of near zero interest rates.

Further information on income and consumption is provided by Table 13. The 12-month rates of increase of RDPI and RPCE in the past eight months show a trend of deterioration of RDPI from over 3 percent in the final four months of 2010 to less than 3 percent in IQ2011 and then collapsing to a range of 1.2 to 0.9 percent in May-Jul. In Aug 2011, RDPI rose only 0.3 percent relative to Aug 2010. RPCE growth decelerated less sharply from close to 3 percent in IVQ 2010 to 2.2 percent in Jul and 1.8 percent in Aug. Market participants have been concerned with data in Tables 12 and 13 showing more subdued growth of RPCE. Growth rates of personal income and consumption have weakened. Goods and especially durable goods have been driving growth of PCE as shown by the much higher 12-months rates of growth of real goods PCE (RPCEG) and durable goods real PCE (RPCEGD) than services real PCE (RPCES). The faster expansion of industry in the economy is derived from growth of consumption of goods and in particular of consumer durable goods while growth of consumption of services is much more moderate. The 12 months rates of growth of RPCEGD have fallen from more than 10 percent in Sep 2010 to Feb 2011 to the range of 6.3 to 7.8 percent in the quarter May-Jul and then 7.0 percent in Aug. RPECG growth rates have fallen from over 5 percent late in 2010 and early Jan-Feb 2011 to the range of 3.5 to 4.0 percent in the quarter May-Jul and then only 2.3 percent in Aug.

Table 13, Real Disposable Personal Income and Real Personal Consumption Expenditures Percentage Change from the Same Month a Year Earlier %

	RDPI	RPCE	RPCEG	RPCEGD	RPCES
2011
Aug	0.3	1.8	2.3	7.0	1.5
Jul	0.9	2.2	3.5	7.1	1.6
Jun	1.2	2.0	3.4	6.3	1.4
May	1.2	2.2	4.0	7.8	1.4
Apr	1.8	2.5	4.7	9.2	1.4
Mar	2.4	2.6	4.5	9.3	1.7
Feb	2.7	2.9	5.9	12.8	1.4
Jan	2.8	2.9	5.8	12.0	1.5
2010
Dec	3.2	2.8	5.4	10.2	1.6
Nov	3.6	3.2	5.9	10.2	1.9
Oct	3.8	2.9	6.1	12.2	1.3
Sep	3.1	2.7	5.6	10.5	1.4

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

Numbers are percentage changes from the same month a year earlier

Source: http://www.bea.gov/newsreleases/national/pi/2011/pdf/pi0811.pdf

Chart 5 shows US real personal consumption expenditures (RPCE) between 1995 and 2011. There is an evident drop in RPCE during the global recession in 2007 to 2009 but the slope is flatter during the current recovery than in the period before 2007.

Chart 5, US, Real Personal Consumption Expenditures 1995-2011

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

Personal income and its disposition are shown in Table 14. An important adversity is shown in Table 12 in the form of sharp deceleration in growth of personal income from $155.3 billion in Jan 2011 relative to Dec 2010 to the contraction by $7.3 billion in Aug relative to Jul. In the same period, growth of wages and salaries fell from $55 billion in Jan/Dec to contraction by $11.8 billion in Aug/Jul.

Table 14, US, Personal Income and its Disposition, Seasonally Adjusted at Annual Rates $ Billions

	Personal Income	Wages & Salaries	Personal Taxes	DPI	Savings Rate %
Aug	13,028.3	6,677.0	1,409.3	11,619.0	4.5
Jul	13,035,6	6,688.8	1,411.6	11,624.0	4.7
Change Aug/Jul	-7.3	-11.8	-2.3	-5.0
Jun	13,018.5	6,666.8	1,408.9	11,609.6	5.3
Change Jul/Jun	17.1	22.0	2.7	14.4
May	12,997.2	6,662.3	1,403.3	11,594.2	5.0
Change Jun/ May	21.3	4.5	5.6	15.4
Apr	12,962.2	6,641.6	1,391.5	11,570.8	5.0
Change May/ Apr	35.0	20.7	11.8	23.4
Mar	12,909.7	6,614.8	1,377.7	11,532.1	4.9
Change Apr/ Mar	52.5	26.8	13.8	38.7
Feb	12,850.6	6,582.9	1,367.1	11,483.5	5.0
Change Mar/ Feb	59.1	31.9	10.6	48.6
Jan	12,780.3	6,536.8	1,352.8	11,427.5	5.2
Change Feb/Jan	70.3	46.1	14.3	56.0
Dec 2010	12,625.0	6,481.4	1,247.6	11,377.3	5.2
Change Jan/ Dec	155.3	55.4	105.2	50.2

Source: http://www.bea.gov/newsreleases/national/pi/2011/pdf/pi0811.pdf

Chart 6 shows the trend of rapid growth of US personal income in another economic cycle in the 1980s. Personal income recovered from the two recessions early in the decade and rapidly surged ahead.

Chart 6, US, Personal Income 1980-1989

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

Chart 7 shows US personal income falling substantially in the recession after 2007. The recovery has been much flatter than in the earlier economic cycle.

Chart 7, US, Personal Income, 2007-2011

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

Chart 8 shows the adverse impact of the recessions in the early 1980s on real disposable income. The adversity during the contraction was followed by dynamic growth of real disposable income.

Chart 8, US, Real Disposable Income, 1980-1989

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

Chart 9 shows the downward impact of the recession of 2007 to 2009 on real disposable income. The expansion phase after the second quarter of 2009 has been characterized by initial growth and then stagnation of real disposable income.

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

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

III World Financial Turbulence. The past three months have been characterized by financial turbulence, attaining unusual magnitude in the past month. Table 15, updated with every comment in this blog, provides beginning values on Sep 26 and daily values throughout the week ending on Fr Sep 30 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 26 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 1.3505/EUR in the first row, first column in the block for currencies in Table 15 for Fri Sep 23, depreciating to USD 1.3518/EUR on Mon Sep 26, or by 0.1 percent. Table 15 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 15 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 1.3392/EUR on Sep 30; 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 Sep 30, such as appreciation of 0.8 percent for the dollar to USD 1.3392/EUR by Sep 23; 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 0.8 percent from the rate of USD 1.3505/EUR on Fri Sep 23 to the rate of USD 1.3392/EUR on Fri Sep 30 {[1.3392/1.3505 – 1]100 = -0.8%} and appreciated by 1.4 percent from the rate of USD 1.3585 on Thu Sep 29 to USD 1.3392/EUR on Fri Sep 30 {[1.3392/1.3585 -1]100 = -1.4%}. The dollar appreciated during the week because fewer dollars, $1.3392, were required to buy one euro on Fri Sep 30 than $1.3305 required to buy one euro on Fri Sep 23. 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 15, Weekly Financial Risk Assets Sep 26 to Sep 30, 2011

9/23/2011

M 26

Tu 27

W 28

Th 29

Fr 30

USD/
EUR

1.3505

2.1%

1.3518

-0.1%

1.3586

-0.6%

-0.5%

1.3564

-0.4%

0.2%

1.3585

-0.6%

-0.1%

1.3392

0.8%

1.4%

JPY/
USD

76.59

0.2%

76.5115

0.1%

76.8913

-0.4%

-0.5%

79.4965

-3.8%

-3.4%

76.7810

-0.2%

3.4%

77.04

-0.6%

-0.3%

CHF/
USD

0.9003

-3.2%

0.9023

-0.2%

0.8973

0.3%

0.6%

0.8986

0.2%

-0.1%

0.8979

0.3%

0.1%

0.908

-0.9%

-1.1%

CHF/EUR
1.2229

-1.2%

1.2197

0.3%

1.2190

0.3%

0.0%

1.2189

0.3%

0.0%

1.2198

0.2%

-0.1%

1.2143

0.7%

0.5%

USD/
AUD

0.978

1.0225

-5.9%

0.9834

1.0169

0.5%

0.9902

1.0099

1.2%

0.7%

0.9796

1.0208

0.2%

-1.1%

0.9776

1.0229

0.0%

-0.2%

0.966

1.0352

-1.2%

10 Year
T Note

1.826

1.90

1.98

1.99

1.912

2 Year T Note
0.219

0.23

0.24

0.25

0.26

0.248

German Bond

2Y 0.39

10Y 1.75

2Y 0.45

10Y 1.83

2Y 0.53

10Y 1.96

2Y 0.59 10Y 2.01

2Y 0.60 10Y 2.01

2Y 0.55

10Y 1.89

DJIA

10771.48

-6.4%

11043.86

2.5%

11190.69

3.9

1.3%

11010.90

2.2%

-1.6%

11153.98

3.6

1.3%

10913.38

1.3%

-2.2%

DJ Global

1700.42

-7.6%

1721.13

1.2%

1780.25

4.6%

3.4%

1755.37

3.2%

-1.4%

1770.69

4.1%

0.9%

1725.68

1.5%

-2.5%

DJ Asia Pacific

1153.83

-7.0

1123.47

-2.6%

1166.95

1.1%

3.9%

1171.67

1.5%

0.4%

1174.42

1.8%

0.2%

1164.97

0.9%

-0.8%

Nikkei
8560.25

-3.4

8374.13

-2.2%

8609.95

0.6%

2.8%

8615.65

0.6%

0.1%

8701.23

1.6%

0.9%

8700.29

1.6%

0.0%

Shanghai

2433.16

-1.9%

2393.18

-1.6%

2415.05

-0.7%

0.9%

2392.06

-1.7%

-0.9%

2365.34

-2.8%

-1.1%

2359.22

-3.0%

-0.3%

DAX
5196.56

-6.8%

5345.56

2.9%

5628.44

8.3%

5.3%

5578.42

7.3%

-0.9%

5639.58

8.5%

1.1%

5502.02

5.9%

-2.4%

DJ UBS Comm.

143.09

-9.1

143.26

0.2%

147.08

2.8%

2.7%

143.23

0.1%

-2.6%

143.96

0.6%

0.5%

140.2

-2.0

-2.6%

WTI $ B
80.22

-8.7%

81.29

1.3%

83.59

4.2%

2.8%

80.85

0.8%

-3.3%

82.63

3.0%

2.2%

78.67

-1.9%

-4.8%

Brent $/B

103.96

-7.2%

103.94

0.0%

106.75

2.7%

103.42

-0.5%

-3.1%

104.44

0.5%

0.9%

102.28

-1.6%

-2.1%

Gold $/OZ

1625.6

-10.3%

1633.0

0.5%

1652.6

1.7%

1.2%

1611.9

-0.8%

-2.5%

1620.6

-0.3%

0.5%

1622.4

-0.2%

0.1%

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 flight from risk exposures to safe havens during the week of Sep 30. Risk aversion is present in the appreciation of the USD by 0.8 percent and the continuing strength of the Japanese yen. 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. The week was filled with rumors of further measures by the SNB. Another symptom of risk aversion is the depreciation of the Australian dollar by 1.2 percent in unwinding carry trades.

Risk aversion is also captured by decline of the yield of the 10-year Treasury note to 1.912 percent on Sep 30 at a level well below consumer price inflation of 3.8 percent in the 12 months ending in Aug (http://www.bls.gov/cpi/). During the financial panic of Sep 2008, funds moved away from risk exposures to government securities. A similar risk aversion phenomenon occurrs in Europe with low levels of the yield of the 10-year government bond on Sep 30 at 0.55 percent for the two-year maturity and 1.89 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 all equity indexes in Table 15 with the exception of the Shanghai Composite in the week of Sep 23. The vote of the German parliament to approve a broader, permanent program of rescue of indebted euro zone countries, European Stability Mechanism (ESM), which followed similar approval by the parliament of Finland, brought relief to financial markets. There were sharp declines of equity indexes on Fri, which was the end of a month and a quarter, with increasing doubts on the effectiveness of the rescue of indebted countries in the euro zone and other risk factors related to slowdown of growth of the world economy.

Commodities roughly tracked other risk financial assets. All three indexes in Table 15 show losses for the week of Sep 23 with gains on Sep 27 that were eroded on Sep 28 and Sep 30. 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. This issue is discussed in the following subsection IIA1 Euro Zone Survival Risk.

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/2011/09/collapse-of-household-income-and-wealth.html http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html).

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

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).

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 Sep 30, the yield of the 2-year bond of the government of Greece was quoted at around 50 percent and the 10-year bond yield traded at over 23 percent. In contrast, the 2-year US Treasury note traded at 0.248 percent and the 10-year at 1.912 percent while the comparable 2-year government bond of Germany traded at 0.55 percent and the 10-year government bond of Germany traded at 1.89 percent (see Table 15). 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 16 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 16, 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 16 are used for some very simple calculations in Table 17. The column “Net Debt USD Billions” in Table 17 is generated by applying the percentage in Table 16 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 17. 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 17, 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 18 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 18 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 18. Data for other countries in Table 18 is also updated with reports from their statistical agencies. Economic data for major regions and countries is considered in Section V World Growth Slowdown following individual country and regional data tables.

Table 18, 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	6.1* output 16.2* input 13.0**	7.7
Euro Zone	1.6	3.0	6.1	10.0
Germany	2.8	2.5	5.7	6.0
France	1.6	2.4	6.1	9.9
Nether-lands	1.5	2.8	8.2	4.4
Finland	2.7	3.5	7.3	7.8
Belgium	2.5	3.4	8.4	6.8
Portugal	-0.9	2.8	5.7	12.3
Ireland	-1.0	1.0	5.0	14.6
Italy	0.8	2.3	4.9	7.9
Greece	-4.8	1.4	8.7	15.1
Spain	0.7	2.7	7.4	21.2

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

*Office for National Statistics

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

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

** Excluding food, beverage, tobacco and petroleum

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

Table 19 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 12 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 19, 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

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 10 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 10, Food and Agriculture Organization Food Price Index 1990-2011

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

Chart 11 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 11, Crude Oil Cushing, OK, Contract 1

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

Monetary policy measures inflation by the index of prices of personal consumption (PCE) but excluding food and energy (PCEX). Table 20 provides inflation of a month relative to the same month a year earlier for the various indexes of personal consumption expenditures. Instead of declining after moderation of commodity price increases, headline PCE inflation has risen from less than 2 percent until Mar to 2.9 percent in Aug. There is a stronger acceleration of the price index of personal consumption expenditures of goods (PCEG) from around 1 percent at the turn of the New Year to 4.8 percent in Aug. Even deflation of prices of personal consumption expenditures of durable goods (PCEGD) has fallen from minus 2.5 percent in Dec 2010 to only minus 0.5 percent in Aug. There is even a rising trend in prices of personal consumption expenditures excluding food and energy (PCEX) from 0.9 percent in Dec to 1.6 percent in Aug. Prices of personal consumption expenditures on food (PCEF) and prices of personal consumption expenditures on energy (PCEE) have also increased and will continue climbing under zero interest rates and moderate risk aversion.

Table 20, US, Percentage Change in 12 Months of Prices of Personal Consumption Expenditures ∆%

	PCE	PCEG	PCEG -D	PCES	PCEX	PCEF	PCEE
2011
Aug	2.9	4.8	-0.5	1.9	1.6	4.8	19.6
Jul	2.8	4.7	-0.2	1.8	1.6	4.3	20.1
Jun	2.6	4.5	-0.5	1.7	1.4	3.9	20.8
May	2.6	4.4	-1.0	1.7	1.3	3.6	21.9
Apr	2.4	3.9	-1.4	1.6	1.2	3.3	19.8
Mar	2.0	3.0	-1.8	1.5	1.0	3.1	16.5
Feb	1.8	2.1	-1.8	1.6	1.1	2.4	11.9
Jan	1.5	1.2	-2.3	1.6	1.0	1.8	7.9
2010
Dec	1.4	1.0	-2.5	1.5	0.9	1.3	8.3
Nov	1.2	0.4	-2.4	1.5	1.0	1.3	4.1
Oct	1.3	0.6	-2.1	1.6	1.0	1.3	6.3
Sep	1.4	0.4	-1.7	1.9	1.2	1.3	4.1
Aug	1.5	0.4	-1.4	1.9	1.4	0.7	3.8

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

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

Chart 12 confirms a mild but persistent increase in the price index of personal consumption expenditures from 1999 to 2011. There was moderation in the two recessions of 2001 and 2007 but an upward trend in other periods. There are no signs of deflation in this series as in Japan in the past decade.

Chart 12, US, Price Index of Personal Consumption Expenditures 1999-2011

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

Chart 13 provides the price index of personal consumption expenditures excluding food and energy from 1999 to 2011. There is a long-term upward trend and no signs of persistent deflation.

Chart 13, US, Price Index of Personal Consumption Expenditures Excluding Food and Energy 1999-2011

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

Chart 14 shows the strong upward trend of the consumer price index (CPI) of the US from 2001 to 2011 with some declines especially during the recessions in 2001 and 2007. Deflation has never been an actual risk in the US.

Chart 14, US, CPI NSA 2001-2011

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

Chart 15 shows the US index of consumer prices excluding food and energy from 2001 to 2011. There is a neat upward trend of inflation.

Chart 15, US, CPI Excluding Food and Energy NSA 2001-2011

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

Unconventional monetary policy of zero interest rates and quantitative easing was used in Japan and now also in the US. Table 21 provides the consumer price index of Japan, with inflation of 0.1 percent in Aug relative to Jul and 0.2 percent from Aug 2010 to Aug 2011. There is deflation in most of the 12 months rates in 2011 with the exception of Jul and Aug. There are eight years of deflation and one of zero inflation in the 12 months rate of inflation in Dec from 1995 to 2010. This experience is entirely different from that of the US as shown in Charts 12 to 15.

Table 21, Japan, Consumer Price Index ∆%

	∆% Month SA	∆% 12 Months NSA
Aug 2011	0.1	0.2
Jul	0.0	0.2
Jun	-0.2	-0.4
May	0.0	-0.4
Apr	0.1	-0.4
Mar	0.3	-0.5
Feb	0.0	-0.5
Jan	-0.1	-0.6
Dec 2010	–0.3	0.0
Dec 2009		-1.7
Dec 2008		0.4
Dec 2007		0.7
Dec 2006		0.3
Dec 2005		-0.1
Dec 2004		0.2
Dec 2003		-0.4
Dec 2002		-0.3
Dec 20		-1.2
Dec 2000		-0.2
Dec 1999		-1.1
Dec 1998		0.6
Dec 1997		1.8
Dec 1996		0.6
Dec 1995		-0.3
Dec 1994		0.7
Dec 1993		1.0
Dec 1992		1.2
Dec 1991		2.7
Dec 1990		3.8

Source: http://www.stat.go.jp/english/data/cpi/index.htm

More detail on the consumer price index of Japan is shown in Table 22. Inflation has been driven by items rich in commodities such as food, energy and transportation. Without risk aversion, unconventional monetary policy is successful in inflating the world economy.

Table 22, Japan CPI Jun 2011 ∆%

	Aug/Jul ∆%	Year ∆%
CPI	0.1	0.2
CPI Excluding Fresh Food	0.1	0.2
CPI Excluding Food, Alcoholic Berages and Energy	0.1	-0.5
CPI Goods	-0.2	0.0
CPI Services	0.4	0.3
CPI Excluding Imputed Rent	0.2	0.2
CPI Fuel, Light, Water Charges	0.6	3.5
CPI Transport Communications	0.5	1.9
CPI Ku-are Tokyo	0.2	-0.2
Fuel, Light, Water Charges Ku Area Tokyo	1.0	3.5

Note: Ku-area Tokyo CPI data preliminary for Sep

Source: http://www.stat.go.jp/english/data/cpi/1581.htm

Inflation of the consumer price index of Germany is provided in Table 23. The flash estimate for Sep is 0.1 percent for the month and 2.6 percent relative to Sep 2010. Inflation appears to moderate after May when the commodity price shock softened with risk aversion. There is still inflation and increasing at the annual equivalent rate of 2.3 percent in the first nine months of 2011.

Table 23, Germany, Consumer Price Index ∆%

	Month SA	12 Months NSA
Sep 2011	0.1	2.6
Aug	0.2	2.4
Jul	0.2	2.4
Jun	0.1	2.3
May	0.1	2.3
Apr	0.3	2.4
Mar	0.2	2.1
Feb	0.2	2.1
Jan	0.3	2.0
AE ∆%	2.3
Dec 2010	0.3	1.7
Dec 2009	0.2	0.9
Dec 2008	-0.1	1.1
Dec 2007	0.2	3.1
Dec 2006	0.2	1.4
Dec 2005	0.1	1.4
Dec 2004	0.3	2.3
Dec 2003	0.0	1.0
Dec 2002	0.2	1.2

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/DE/Presse/pm/2011/09/PD11__360__611,templateId=renderPrint.psml

Chart 16 of the Statistisches Bundesamt Deutschland of Germany shows an evident upward trend of inflation in Germany between 2003 and 2012. The interruption caused by the global recession when risk aversion caused collapse of commodity prices was followed by resumption of the upward trend.

Chart 16, Germany, Consumer Price Index NSA

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

Chart 17 of the Statistisches Bundesamt Deutschland shows cyclical analysis of Germany’s consumer price index. There was an evident upward trend before the collapse of commodity prices before 2007. There is another clear upward trend since 2010.

Chart 17, Germany, Consumer Price Index NSA and Trend

Source: Statistisches Bundesamt Deutschland http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/Prices/Content100/kpre510graf0.psml

Inflation of the producer price index (PPI) for the French market shown in Table 24 has evidently moderated since the decline of commodity prices after May. In Aug 2011, PPI inflation was zero percent and 6.3 percent in 12 months.

Table 24, France, Producer Price Index for the French Market, ∆%

	Month	12 Months
Aug 2011	0.0	6.3
Jul	0.5	6.4
Jun	-0.1	8.1
May	-0.5	6.2
Apr	1.0	6.7
Mar	0.9	6.7
Feb	0.8	6.3
Jan	0.9	5.6
Dec 2010	0.8	5.4
Dec 2009	0.1	-2.9
Dec 2008	-1.5	-0.2
Dec 2007	0.6	5.2
Dec 2006	-0.2	2.9
Dec 2005	0.2	6.4

Source: Institut National de la Statistique et des Études Économiques http://www.bdm.insee.fr/bdm2/choixCriteres.action?request_locale=en&codeGroupe=966

Chart 18 of the Institut National de la Statistique et des Études Économiques of France shows various PPI prices. The indexes fell sharply after the collapse of commodity prices in late 2008. Renewed increases in commodity prices largely because of zero interest rates caused an upward trend of France’s PPI inflation. Chart 18 shows an evident stall and some declines in PPI inflation as measured by the various indexes.

Chart 18, France, Producer Price Index (PPI)

Source: Institut National de la Statistique et des Études Économiques http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20110930

The components of the PPI of France for the domestic market are shown in Table 25. Prices of manufactured goods were flat in Aug but rose 6.7 percent in the 12 months ending in Aug. Coke, refined petroleum and similar items fell 2.2 percent in the month but rose 27.0 percent in 12 months. Positive increases occurredin electric and electronic products, transport equipment and other manufactured goods.

Table 25, France, Producer Price Index for the Domestic Market, %

Aug 2011	Weight	Month ∆%	12 Months ∆%
Total	1000	0.0	6.3
Mining	130	0.0	6.7
Mfg	870	0.0	6.2
Food	188	0.0	6.8
Coke, Refined Petroleum	70	-2.2	27.0
Electrical, Electronic	92	0.6	1.4
Transport	79	0.3	2.2
Other Mfg	441	0.3	4.0

Source: Institut National de la Statistique et des Études Économiques http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20110930

Industrial prices for the internal market in Italy moderated after subdued commodity prices beginning in May, as shown in Table 26. Industrial prices rose 0.1 percent in Aug and 4.8 percent in 12 months. The 12 month rate has declined significantly from a high of 6.2 percent in Mar. Industrial prices rose sharply during the commodity price boom from 2004 to 2008, falling by 5.4 percent in 2009 after the decline in commodity prices and increasing again after 2010.

Table 26, Italy, Industrial Prices, Internal Market

	Month ∆%	12 Months ∆%
Aug 2011	0.1	4.8
Jul 2011	0.3	4.9
Jun	0.0	4.6
May	-0.2	4.8
Apr	0.7	5.6
Mar	0.8	6.2
Feb	0.7	5.8
Jan	1.2	5.3
AE ∆%	6.8
Dec 2010	0.7	4.7
Year
2010		3.0
2009		-5.4
2008		5.9
2007		3.3
2006		5.2
2005		4.0
2004		2.7
2003		1.6
2002		0.2
2001		1.9

Source:

http://www.istat.it/it/archivio/40761

Chart 19 of the Istituto Nazionale di Statistica of Italy provides 12 months rates of increase of industrial prices for the internal market. The rise of inflation of industrial prices in 2010 and early 2011 and subsequent decline is evident in Chart 19.

Chart 19, Italy, Producer Prices for the Internal Market 12 Months ∆%

Source: Istituto Nazionale di Statistica http://www.istat.it/en/

Inflation of industrial prices in Italy by components is provided in Table 27. In Aug, energy prices fell 0.6 percent while the 12 months rate was still high at 8.2 percent. Inflation of consumer goods was high at 0.5 percent in Aug but only 3.3 percent in 12 months.

Table 27, Italy, Industrial Prices, Internal Market, ∆%

	Aug 2011/ Jul 2011	Aug 2011/ Aug 2010
Total	0.1	4.8
Consumer Goods	0.5	3.3
Durable Goods	0.1	2.3
Nondurable	0.5	3.7
Intermediate	0.1	5.7
Energy	-0.6	8.2

Source: http://www.istat.it/it/archivio/40761

While producer prices moderated after May because of subdued commodity prices, Italy’s consumer prices continued rising, especially in Aug and Jul both with 0.3 percent, as shown in Table 28. The 12 months rate of CPI inflation in Sep of 3.1 percent is similar to the annual equivalent of 2.9 percent in Jan-Sep.

Table 28, Italy, Consumer Price Index

	Month	12 Months
Sep 2011	0.1	3.1
Aug	0.3	2.8
Jul	03	2.7
Jun	0.1	2.7
May	0.1	2.6
Apr	0.5	2.6
Mar	0.4	2.5
Feb	0.3	2.4
Jan	0.4	2.1
Jan-Sep AE ∆%	2.9
Dec 2010	0.4	1.9

Source: http://www.istat.it/it/archivio/40737

Chart 20 of the Istituto Nazionale di Statistica of Italy provides the 12 month rates of CPI inflation. There has not been relatively comparable moderation of CPI inflation as that of PPI inflation.

Chart 20, Italy, Consumer Prices 12 Months ∆%

Source: Istituto Nazionale di Statistica http://www.istat.it/en/

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

VA United States. The nonmanufacturing PMI of the Institute for Supply Management rose 0.6 percentage points from 52.7 in Jul to 53.3 in Aug, indicating faster growth, while the manufacturing purchasing managers’ index fell 0.3 percentage points from 50.9 in Jul to 50.6 in Aug, indicating slower growth (http://www.ism.ws/ISMReport/NonMfgROB.cfm). Business activity fell 0.5 percentage points for the nonmanufacturing index from 56.1 in Jul to 55.6, indicating slower growth, but fell 3.7 percentage points in manufacturing, from 52.3 in Jul to 48.6 in Aug, now indicating contraction. New orders rose 1.1 percentage points for the nonmanufacturing survey from 51.7 in Jul to 52.8 in Aug, indicating faster growth, and increased 0.4 points from 49.2 in Jul to 49.6 in Aug, which remains in contraction territory. The Chicago Business Barometer^™ survey of the Chicago Institute for Supply Management (ISM) for Sep released on Sep 30 (https://www.ism-chicago.org/chapters/ism-ismchicago/files/ISM-CSeptember2011forISMHomepage.pdf) indicates significant recovery. The overall index rose SA from 56.5 in Aug to 60.4 in Sep. Production SA rose from 57.8 in Aug to 63.9 in Sep and new orders SA rose from 56.9 in Aug to 65.3 in Sep, erasing the entire decline since Apr. The employment index jumped from 52.1 in Aug to 60.1 in Sep. The ISM index will be released on Oct 3.

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 ∆%: 1.0 First semester 2011 AE ∆% 0.7 Blog 08/28/11
Personal Income and Consumption	Jul month ∆% SA Real Disposable Personal Income (RDPI) -0.1 Jul month SA ∆% Real Personal Consumption Expenditures (RPCE): 0.5 12 months NSA ∆%: RDPI: 1.2; RPCE ∆%: 1.6 Blog 09/04/11
Quarterly Services Report	IIQ11/IQII SA ∆%: Information 2.0 Professional 1.6 Administrative 2.1 Hospitals 1.8 Blog 09/11/11
Employment Cost Index	IIQ2011 SA ∆%: 0.7 Jun 12 months ∆%: 3.4 Blog 08/07/11
Industrial Production	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/Jun New Orders SA ∆%: 2.4; ex transport ∆%: 0.9 12 months Jun NSA ∆%: 12.6; ex transport ∆% 12.9 Blog 09/04/11
Durable Goods	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-Jul 2011/2010 ∆%: Total 14.5; Durable Goods: 11.4; Nondurable Goods 17.2 Blog 09/11/11
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	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	Jun SAAR month SA ∆%: -1.3 Jun 12 months NSA: –0.5 Blog 09/04/11
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	Jul ∆% annual rate: 5.9% Blog 09/12/11
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: 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

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

Durable goods seasonally-adjusted orders fell 0.1 percent in Aug relative to Jul and shipments fell 0.2 percent, as shown in Table 29. The decline is less worrisome because of strong growth of orders in Jul by 4.1 percent and shipments by 2.1 percent. Industrial orders are highly volatile. The data are not adjusted for price changes and include large-value items that cause fluctuations in monthly data. Orders excluding transportation lost 0.1 percent in Aug while shipments gained 1.2 percent. Excluding defense orders lost 0.1 percent in Aug and shipments declined 0.4 percent. There could be cause for concern of the decline in orders excluding transportation and defense. New orders of computers and related products gained 5.5 percent in Aug after losing 7.3 percent in Jul. Another negative development is the decline new orders of motor vehicles and parts of 8.5 percent in Aug after increasing 10.2 percent in Jul. Financial markets focused on capital goods on the argument that it would suggest investment. New orders of capital goods rose 4.2 percent in Aug after increasing 3.1 percent in Jul. Nondefense new orders of capital goods rose 5.2 percent in Aug after increasing 4.3 percent in Jul. Another favorable development was the increase by 1.1 percent in capital goods new orders excluding aircraft. The volatility of durable goods data is found in nondefense aircraft new orders growing 23.5 percent in Aug, 49.9 percent in Jul and falling 24.0 percent in Jun.

Table 29, Durable Goods Manufacturers’ Shipments and New Orders, SA, %

	Aug/Jul ∆%	Jul/Jun ∆%	Jun/May ∆%
Total
S	-0.2	2.1	1.1
NO	-0.1	4.1	-1.1
Excluding Transport
S	1.2	0.6	1.4
NO	-0.1	0.7	0.7
Excluding Defense
S	-0.4	2.5	1.2
NO	-0.1	4.8	-0.8
Computers & Electronic Products
S	0.2	1.9	-1.2
NO	1.3	-3.5	0.9
Computers & Related Products
S	-0.1	0.5	2.4
NO	5.5	-7.3	1.7
Transport Equipment
S	-4.6	7.1	0.3
NO	-0.3	15.0	-6.6
Motor Vehicles & Parts
S	-8.5	10.0	-0.2
NO	-8.5	10.2	0.1
Nondefense Aircraft
S	2.7	8.8	3.2
NO	23.5	49.9	-24.0
Capital Goods
S	2.7	0.8	1.7
NO	4.2	3.1	-2.4
Nondefense Capital Goods
S	2.7	1.5	2.1
NO	5.2	4.3	-2.4
Nondefense Capital Goods Excluding Aircraft
S	2.8	0.4	2.0
NO	1.1	-0.2	0.8

Note: S: shipments; NO: new orders; Transport: transportation. Data adjusted for seasonality but not adjusted for inflation.

Source: http://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf

Chart 21 of the US Bureau of the Census shows new orders for durable goods from Sep 2010 to Aug 2011. There is significant volatility in these data that clouds analysis of the trend of growth of output.

Chart 21, US, Durable Goods New Orders 2010-2010, SA, Monthly Percentage Changes

Source: US Bureau of the Census http://www.census.gov/briefrm/esbr/www/esbr021.html

Table 30 shows growth of new orders and shipments of durable goods in the first eight months of 2011 relative to the same period in 2010. Data are not adjusted for seasonality or price changes. New orders rose 10.1 percent in Jan-Aug 2011 relative to the same period a year earlier, 9.3 percent excluding transportation equipment and 11.5 percent excluding defense. The monthly and 12 months rate of growth are consistent with continuing expansion of the US economy. While new orders of the more aggregate component of computers and electronic products did not change relative to a year earlier, the sub-segment of new orders of computers and related products grew 10.9 percent. Transportation equipment new orders rose 10.8 percent and motor vehicles rose 10.8 percent even after disappointing drop of 8.5 percent in Aug relative to Jul. Nondefense aircraft rose 46.1 percent. New orders of total capital goods rose 11.5 percent and nondefense capital goods excluding aircraft rose 11.9 percent.

Table 30, Durable Goods Manufacturers’ Shipments and New Orders, NSA, %

	Jan-Aug 2011/Jan-Aug 2010 ∆%
Total
S	7.7
NO	10.1
Excluding Transport
S	8.9
NO	9.3
Excluding Defense
S	9.5
NO	11.5
Computers & Electronic Products
S	2.5
NO	0.0
Computers & Related Products
S	11.7
NO	10.9
Transport Equipment
S	4.1
NO	12.8
Motor Vehicles
S	10.4
NO	10.8
Nondefense Aircraft
S	6.7
NO	46.1
Capital Goods
S	5.4
NO	11.5
Nondefense Capital Goods
S	9.4
NO	14.7
Nondefense Capital Goods Excluding Aircraft
S	9.9
NO	11.9

Note: S: shipments; NO: new orders; Transport: transportation. Data not adjusted for seasonality and not adjusted for inflation.

Source: http://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf

New orders and shipments of durable goods are highly cyclical, as shown in Table 31. New orders and shipments fell during the contraction in 2008 and 2009 and also in 2001.

Table 31, US, Percentage Change of Durable Goods Manufacturers’ Shipments and New Orders

Jan/Aug Relative to Earlier Year	Shipments ∆%	New Orders ∆%
2011	7.7	10.1
2010	8.3	15.2
2009	-18.9	-24.9
2008	-0.6	-1.6
2007	0.3	1.7
2006	7.8	9.3
2005	NA	NA
2004	10.7	12.4
2003	-1.0	-0.1
2002	2.5	7.2
2001	-8.4	-14.3
2000	-6.1	4.9
1999	7.6	10.0
1998	1.8	5.3
1997	10.2	4.9
1996	7.8	11.9
1995	5.6	6.5

Source: http://www.census.gov/manufacturing/m3/historical_data/index.html

Data and other information continue to provide depressed conditions in the US housing market. Table 32 shows sales of new houses in the US at seasonally-adjusted annual equivalent rate. Sales fell 2.3 in Aug relative to Jul. The cumulative percentage from Jan to Aug is minus 10.8 percent and become positive by 2.8 percent when including the 15.3 percent increase in Dec.

Table 32, US, Sales of New Homes at Seasonally-Adjusted (SA) Annual Equivalent Rate, Thousands and %

	SA Annual Rate Thousands	∆%
Aug 2011	295	-2.3
Jul	302	-0.3
Jun	303	-1.6
May	308	-2.5
Apr	316	3.6
Mar	305	8.5
Feb	281	-9.4
Jan	310	-6.3
Dec 2010	331	15.3

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

There is additional information of the report of new house sales in Table 33. The stock of unsold houses stabilized at 6.6 monthly equivalent sales at current sales rates. Median and average house prices oscillate. In Aug, median and average prices of new houses sold without seasonal adjustment fell 8.7 percent. Apr is the only month so far in 2011 with strong price increases, 1.9 percent for median prices and 3.1 percent for average prices.

Table 33, US, New Home Stocks and Median and Average New Homes Sales Price

	Unsold* Stocks in Equiv. Months of Sales SA %	Median New Home Sales Price USD NSA	Month ∆%	Average New Home Sales Price USD NSA	Month ∆%
Aug 2011	6.6	209,100	-8.7	246,000	-8.7
Jul	6.5	228,900	-3.9	269,500	-1.1
Jun	6.6	238,400	7.4	272,500	3.7
May	6.5	222,000	-1.2	262,700	-2.3
Apr	6.6	224,700	1.9	268,900	3.1
Mar	7.0	220,500	0.2	260,800	-0.8
Feb	7.8	220,100	-8.3	262,800	-4.7
Jan	7.2	240,100	-0.5	275,700	-5.5
Dec 2010	6.9	241,200	9.8	291,700	3.5

*Percent of new houses for sale relative to houses sold

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

The depressed level of residential construction and new house sales in the US is evident in Table 34 providing new house sales in the first eight months of various years. Sales of new houses are substantially lower in any year between 1995 and 2011. Sales of new houses in the first eight months of 2011 are lower by 8.3 percent in relation to the same period in 2010 and 18.8 percent below the level in the same period in 2009. The housing boom peaked in 2005 and 2006 when increases in fed funds rates affected subprime mortgages that were programmed for refinancing in two or three years when price increases forever would raise home equity. Higher home equity would permit refinancing under feasible mortgages incorporating payment of principal and interest (Gorton 2009EFM; see other references in http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html). Sales of new houses in the first eight months of 2011 relative to the same period in 2005 fell 76.6 percent and 71.9 percent relative to the same period in 2006. Similar percentage declines are also observed for the years from 2000 to 2004. Sales of new houses in the first eight months of 2011 fell 54.6 per cent relative to the same period in 1995.

Table 34, US, Sales of New Homes Not Seasonally Adjusted, Thousands and %

	Not Seasonally Adjusted Thousands
Jan-Aug 2011	212
Jan-Aug 2010	232
∆%	-8.3*
Jan-Aug 2009	261
∆% Jan-Aug 2011/ Jan-Aug 2009	-18.8
Jan-Aug 2008	365
∆% Jan-Aug 2011/ Jan-Aug 2008	-41.9
Jan-Aug 2007	576
∆% Jan-Jun 2011/ Jan-Aug 2006	-63.2
Jan-Aug 2006	755
∆% Jan-Aug 2011/Jan-Aug 2006	-71.9
Jan-Aug 2005	906
∆% Jan-Aug 2011/Jan-Aug 2005	-76.6
Jan-Aug 2004	841
∆% Jan-Aug 2011/Jan-Aug 2003	-74.8
Jan-Aug 2003	758
∆% Jan-Aug 2011/ Jan-Aug 2003	-72.0
Jan-Aug 2002	671
∆% Jan-Aug 2011/ Jan-Aug 2001	-68.4
Jan-Aug 2001	643
∆% Jan-Jun 2011/ Jan-Aug 2001	-67.0
Jan-Aug 2000	608
∆% Jan-Aug 2011/ Jan-Aug 2000	-65.1
Jan-Aug 1995	467
∆% Jan-Aug 2011/ Jan-Aug	-54.6

*Computed using unrounded data

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

Table 35 provides the entire available series of new house sales from 1963 to 2010. The level of 323 thousand new houses sold in 2010 is the lowest since 1963 in the 47 years of available data. In that period, the population of the US rose from 179 million in 1960 to 309 million in 2010, or 72.6 percent. In fact, there is no year from 1963 to 2010 in Table 35 with sales of new houses below 400 thousand.

Table 35, US, New Houses Sold, NSA Thousands

1963	560
1964	565
1965	575
1966	461
1967	487
1968	490
1969	448
1970	485
1971	656
1972	718
1973	634
1974	519
1975	549
1976	646
1977	819
1978	817
1979	709
1980	545
1981	436
1982	412
1983	623
1984	639
1985	688
1986	750
1987	671
1988	676
1989	650
1990	534
1991	509
1992	610
1993	666
1994	670
1995	667
1996	757
1997	804
1998	886
1999	880
2000	877
2001	908
2002	973
2003	1,086
2004	1,203
2005	1,283
2006	1,051
2007	776
2008	485
2009	375
2010	323

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

Chart 22 of the US Bureau of the Census shows the sharp decline of sales of new houses in the US. Sales rose temporarily until about mid 2010 but then declined to a lower plateau.

Chart 22, US, New One-Family Houses Sold in the US, SAAR

Source: US Bureau of the Census http://www.census.gov/briefrm/esbr/www/esbr051.html

Percentage changes and average rates of growth of new house sales for selected periods are shown in Table 36. The percentage change of new house sales from 1963 to 2010 is minus 42.3 percent. Between 1991 and 2001, sales of new houses rose 78.4 percent at the average yearly rate of 5.9 percent. The rate increased between 1995 and 2005 with percentage increase of 92.4 percent and average yearly rate of 6.8 percent. There are similar rates in all years from 2000 to 2004. The boom in housing construction and sales began in the 1980s and 1990s. The collapse of real estate culminated several decades of housing subsidies and policies to lower mortgage rates and borrowing terms (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009b), 42-8). The sales of new houses sold in the first eight months of 2011 fell 54.6 percent relative to the same period in 1995.

Table 36, US, Percentage Change and Average Yearly Rate of Growth of New One-Family Houses

	∆%	Average Yearly % Rate
1963-2010	-42.3	NA
1991-2001	78.4	5.9
1995-2005	92.4	6.8
2000-2005	46.3	7.9
1995-2010	-51.6	NA
2000-2010	-63.2	NA
2005-2010	-74.8	NA

NA: Not Applicable

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

The available historical data of median and average prices of new houses sold in the US between 1963 and 2010 is provided in Table 37. On a yearly basis, median and average prices reached a peak in 2007 and the fell substantially.

Table 37, US, Median and Average Prices of New Homes Sold, Annual Data

Period	Median	Average
1963	$18,000	$19,300
1964	$18,900	$20,500
1965	$20,000	$21,500
1966	$21,400	$23,300
1967	$22,700	$24,600
1968	$24,700	$26,600
1969	$25,600	$27,900
1970	$23,400	$26,600
1971	$25,200	$28,300
1972	$27,600	$30,500
1973	$32,500	$35,500
1974	$35,900	$38,900
1975	$39,300	$42,600
1976	$44,200	$48,000
1977	$48,800	$54,200
1978	$55,700	$62,500
1979	$62,900	$71,800
1980	$64,600	$76,400
1981	$68,900	$83,000
1982	$69,300	$83,900
1983	$75,300	$89,800
1984	$79,900	$97,600
1985	$84,300	$100,800
1986	$92,000	$111,900
1987	$104,500	$127,200
1988	$112,500	$138,300
1989	$120,000	$148,800
1990	$122,900	$149,800
1991	$120,000	$147,200
1992	$121,500	$144,100
1993	$126,500	$147,700
1994	$130,000	$154,500
1995	$133,900	$158,700
1996	$140,000	$166,400
1997	$146,000	$176,200
1998	$152,500	$181,900
1999	$161,000	$195,600
2000	$169,000	$207,000
2001	$175,200	$213,200
2002	$187,600	$228,700
2003	$195,000	$246,300
2004	$221,000	$274,500
2005	$240,900	$297,000
2006	$246,500	$305,900
2007	$247,900	$313,600
2008	$232,100	$292,600
2009	$216,700	$270,900
2010	$221,800	$272,900

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

Percentage changes of median and average prices of new houses sold in selected years are shown in Table 38. Prices rose sharply between 2000 and 2005. In fact, prices in 2011 are higher than in 2000. Between Aug 2006 and Aug 2011, median prices of new houses sold fell 14.3 percent and average prices fell 22.5 percent. Between Aug 2010 and Aug 2011, median prices fell 7.7 percent and average prices declined 8.5 percent.

Table 38, US, Percentage Change of New Homes Median and Average Prices, NSA, ∆%

	Median New Home Sales Prices ∆%	Average New Home Sales Prices ∆%
∆% Aug 2000 to Aug 2003	14.3	20.4
∆% Aug 2000 to Aug 2005	44.1	47.4
∆% Aug 2000 to Aug 2011	25.5	22.9
∆% Aug 2005 to Aug 2011	-12.9	-16.6
∆% Aug 2006 to Aug 2011	-14.3	-22.5
∆% Aug 2009 to Aug 2011	0.9	-4.6
∆% Aug 2010 to Aug 2011	-7.7	-8.5

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

Table 39 shows the euphoria of prices during the boom and the subsequent decline. House prices rose by 94.1 percent in the 10-city composite of the Case-Shiller home price index and 78.8 percent in the 20-city composite between Jul 2000 and Jul 2005. Prices rose by more than 100 percent from Jul 2000 to Jul 2006, increasing 107.5 percent for the 10-city composite; and almost doubled, increasing by 91.6 percent for the 20-city composite. Prices have fallen 30.9 percent since 2006 for the 10-city composite and also 30.9 percent for the 20-city composite. Measuring house prices is quite difficult because of the lack of homogeneity that is typical of standardized commodities. In the 12 months ending in Jul 2011, house prices fell 3.7 percent in the 10-city composite and fell 4.1 percent in the 20-city composite in what has become a second round of decreases in prices of houses in the US.

Table 39, US, Percentage Changes of Standard & Poor’s Case-Shiller Home Price Indices, Not Seasonally Adjusted, ∆%

	10-City Composite	20-City Composite
∆% Jul 2000 to Jul 2003	39.1	32.7
∆% Jul 2000 to Jul 2005	94.1	78.8
∆% Jul 2000 to Jul 2006	107.5	91.6
∆% Jul 2000 to Jul 2011	43.3	32.5
∆% Jul 2005 to Jul 2011	-26.2	-25.9
∆% Jul 2006 to Jul 2011	-30.9	-30.9
∆% Jul 2009 to Jul 2011	0.2	-1.1
∆% Jul 2010 to Jul 2011	-3.7	-4.1

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

House prices continued to decline from Dec 2010 to Mar 2011, as shown in Table 40, both monthly price changes and 12-month price changes. House prices have been mostly flat in the seasonally-adjusted monthly changes in the months from Apr to Jul 2011. There is no prospect for a boom in housing because of the paucity of available credit at higher lending standards and the fractured state of the housing finance sector. Funding for home loans is obtained by securitizing individual mortgages in bonds that are sold to investors who in turn finance them in sale and repurchase agreements. Litigation and uncertainty of future service of interest and principal of underlying mortgages in asset-backed securities discourages investors who would fund new mortgages. The mortgage-rate reducing effect of the “let’s twist again” monetary policy, if any, would not be effective in stimulating the housing sector in an environment of collapse of wealth, income, employment and hiring.

Table 40, Monthly Percentage Change of S&P Case-Shiller Home Price Indices, Seasonally Adjusted, ∆%

	10-City Composite	20-City Composite
Jul 2011	-0.1	0.05
Jun	0.04	0.04
May	0.01	0.0
Apr	0.2	0.2
Mar	-0.4	-0.4
Feb	-0.4	-0.3
Jan	-0.4	-0.3
Dec 2010	-0.4	-0.4

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

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

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

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

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

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

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

W = Y/r (1)

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

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

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

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 resulted 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.

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: 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

Japan is experiencing weak internal demand as in most advanced economies. Table 41 provides Japan’s retail and wholesale sales. Retail sales fell 2.6 percent in the 12 months ending in Aug and have not recovered from the deep drops in Mar and Apr following the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011.

Table 41, Japan, Wholesale and Retail Sales 12 Month ∆%

	Total	Wholesale	Retail
Aug 2011	3.3	5.6	-2.6
Jul	2.3	3.0	0.6
Jun	3.1	3.8	1.2
May	1.3	2.3	-1.3
Apr	-2.6	-1.7	-4.8
Mar	-1.3	1.2	-8.3
Feb	5.3	7.2	0.1
Jan	3.3	4.6	0.1
Dec 2010	3.5	5.7	-2.1
Calendar Year
2010	1.5	1.1	2.5
2009	-20.5	-25.6	-2.3
2008	1.2	1.5	0.3

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

Japan’s industrial production rose 0.8 percent in Aug relative to Jul, as shown in Table 42. Monthly industrial production has climbed in every month since the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Industrial production was higher in 12 months for the first month in Aug

Table 42, Japan, Industrial Production ∆%

	∆% Month SA	∆% 12 Months NSA
Aug 2011	0.8	0.6
Jul	0.4	-3.0
Jun	3.8	-1.7
May	6.2	-5.5
Apr	1.6	-13.6
Mar	-15.5	-13.1
Feb	1.8	2.9
Jan	0.0	4.6
Dec 2010	2.4	5.9
Calendar Year
2010		16.7
2009		-21.3
2008		-3.2

Source: http://www.meti.go.jp/statistics/tyo/iip/result/pdf/press/h2a1008j.pdf

The employment report for Japan in Aug in Table 43 is encouraging. The rate of unemployment has fallen to 4.4 percent from 4.6 percent in Jun.

Table 43, Japan, Employment Report Aug 2011

Unemployed	2.76 million
Change since last year	-450 thousand; ∆% –14.0
Unemployment rate	4.4% SA -0.2 from 4.6% in Jun –0.7 from earlier year
Population	105.36 million
Labor Force	62.42 million
Change since last year	-76 thousand ∆% –1.2
Employed	59.67 million
Change since last year	-29 thousand ∆% –0.5
Labor force participation rate	59.2%
Change since last year	-0.7
Employment rate	56.6%
Change since last year	-0.2

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

Chart 23 provides the unemployment rate of Japan in 2009 to 2011. The sharp decline in Aug is the best reading in 2011.

Chart 23, Japan, Unemployment Rate 2009-2011

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

The survey of household income and consumption of Japan in Table 44 is quite weak. Total consumption fell 4.0 percent in real terms. Almost all the items of consumption are negative in nominal and real terms with the exception of housing in real terms in 12 months and nominal and real changes for clothing and footwear and medical care. Household income, disposable income and consumption expenditures all fell in nominal and real terms in Aug 2011 relative to a year earlier.

Table 44, Japan, Family Income and Expenditure Survey 12-months ∆% Relative to a Year Earlier

Aug 2011	Nominal	Real
Households of Two or More Persons
Total Consumption	-3.9	-4.1
Excluding Housing, Vehicles & Remittance		-4.0
Food	-1.8	-1.6
Housing	-6.1	6.3
Fuel, Light & Water Charges	-4.1	-7.3
Furniture & Household Utensils	-7.9	-3.1
Clothing & Footwear	2.3	1.8
Medical Care	6.4	7.2
Transport and Communications	-10.9	-12.6
Education	-5.3	-5.5
Culture & Recreation	-9.6	-6.6
Other Consumption Expenditures	-3.3	-3.5*
Workers’ Households
Income	-1.5	-1.7
Disposable Income	-1.7	-1.9
Consumption Expenditures	-4.5	-4.7

*Real: nominal deflated by CPI excluding imputed rent

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

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. 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 Composite output PMI^® registered 50.7 in Aug, lower than 51.1 in Jul, which is the second weakest rate since Aug 2009 when recovery began (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8486). Chris Williamson, Chief Economist at Markit, finds that growth is the slowest in two years with recovery almost dropping to standstill. New business fell for the first in two years when recovery began. Weakness is across all member states. The Markit Flash Eurozone Composite Output PMI^®, showing high association with euro zone GDP since 1999, registered 49.2 in Sep, in contraction territory, compared with 50.7 in Aug, being the lowest level since Jul 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8568). There is significant difference between core and periphery in the euro zone. Growth of output was nearly stagnant in both Germany and France for the lowest expansion rates since the beginning of recovery more than two years ago. There was a fourth monthly consecutive contraction in the rest of the euro zone with acceleration of decline at the highest rate since Jul 2009. The Chief Economist at Markit, Chris Williamson, finds possible stagnation of the euro zone in the third quarter with the first contraction in Sep in more than two years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8568). There could be more contraction in future months as suggested by acceleration of the rate of decline of new business and confidence in the next year in services. There has been decline from higher growth rates for Germany and France to near stagnation while the rest of the euro zone contracts. The only good news in the report is the moderation of prices. 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 Jul 12 months ∆%: 6.1 Blog 09/04/11
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	Jul month ∆%: 0.2 Jul 12 months ∆%: –0.2 Blog 09/11/11
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: 09/25/11 http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html

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

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

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

The rate of unemployment in the euro area remains at 10.0 percent in Aug, as shown in Table 45. There are 15.739 million without employment. The global recession has left high levels of unemployment in most advanced economies.

Table 45, Euro Area, Unemployment Rate and Number of Unemployed, % and Millions

	Unemployment Rate %	Number Unemployed Millions
Aug 2011	10.0	15.739
Jul	10.0	15.777
Jun	10.0	15.696
May	10.0	15.672
Apr	9.9	15.608
Mar	10.0	15.653
Feb	10.0	15.665
Jan	10.0	15.704
Aug 2010	9.6	15.524

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/3-30092011-BP/EN/3-30092011-BP-EN.PDF

Table 46 provides the euro area harmonized index of consumer prices, rate of unemployment and GDP growth from 1999 to 2011. The gains in reducing the rate of unemployment to 7.6 percent by 2007 were eroded by the global recession with increase of the rate of unemployment to 10.0 percent. GDP growth is stalling at the margin with significant differences in the economies of member countries.

Table 46, Euro Area, HICP, Rate of Unemployment and GDP

	Harmonized Index of Consumer Prices ∆%	Rate of Unemployment %	GDP ∆%
2011	3.0	10.0	1.6*
2010	1.6	10.1	1.8
2009	0.3	9.6	-4.1
2008	3.3	7.6	0.4
2007	2.1	7.6	2.8
2006	2.2	8.5	3.1
2005	2.2	9.2	1.7
2004	2.2	9.0	2.2
2003	2.1	8.9	0.8
2002	2.3	8.5	0.9
2001	2.4	8.1	1.9
2000	2.2	8.5
1999	1.2	9.4

*EUROSTAT Forecast; HICP flash for Sep 2011 and Rate of Unemployment for Aug 2011

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

The Economic Sentiment Indicator of the European Economic Commission, Economic and Financial Affairs, provides excellent correlation with the economic cycle since 1990, capturing all three recessions in the period and even the threat of recession from 1994 to 1995. The latest chart of this index shows trend of decline in 2011 that has punctured the historical average of 100 (http://ec.europa.eu/economy_finance/db_indicators/surveys/index_en.htm). This deterioration is shown in Table 47 with the index falling from 108.0 in Feb to 95.0 in Sep.

Table 47, Euro Area, Indicators of Confidence and Economic Sentiment SA

	ESI	IND	SERV	CON	RET	CONS
Sep 2011	95.0	-5.9	0.0	-19.1	-9.8	-26.0
Aug	98.4	-2.7	3.7	-16.5	-8.7	-23.4
Jul	103.0	0.9	7.9	-11.2	-3.6	-24.3
Jun	105.4	3.5	10.1	-9.7	-2.6	-23.5
May	105.5	3.8	9.3	-9.9	-2.4	-24.7
Apr	106.1	5.6	10.3	-11.6	-1.8	-24.3
Mar	107.3	6.6	10.8	10.6	-1.4	-25.4
Feb	108.0	6.7	11.2	-10.0	-0.2	-24.2
Jan	106.8	6.2	9.9	-11.2	-0.6	-26.0
Dec 2010	107.0	5.3	9.8	-11.0	4.3	-26.7

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

Source: European Commission Services http://ec.europa.eu/economy_finance/db_indicators/surveys/index_en.htm

Table 48, Germany, People Employed, whose Place of Residence is in Germany, Employment Accounts

	# Employed NSA Millions	∆% 12 months	# Employed SA Millions	∆% Month/ Prior Month
Aug 2011	41.082	1.3	4.109	0.0
Jul	41.024	1.4	41.099	0.1
Jun	41.025	1.4	41.064	0.1
May	40.974	1.4	41.016	0.1
Apr	40.876	1.4	40.977	0.1
Mar	40.691	1.5	40.925	0.1
Feb	40.548	1.5	40.865	0.1
Jan	40.521	1.4	40.820	0.2
Dec 2010	40.891	1.1	40.745	0.1
Dec 2009	40.447	-0.2	40.301	0.0
Jan 2009	40.111	-1.0	40.403	0.1

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

Source: Statistisches Bundesamt Deutschland http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/09/PE11__361__132,templateId=renderPrint.psml

VE Germany. The Markit Germany Services PMI^® with Composite PMI^® data for manufacturing and services exhibits high association with German GDP since 1997. The composite output index registered 51.3 in Aug, lower than 52.5 in Jul, indicating the slowest expansion of Germany’s private sector out in the 25 months of recovery (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8460). The information shows weakness in both manufacturing and services. The favorable events are reduced pressure in inflation of inputs. The Markit Flash Germany PMI^®, with high association with German GDP since 1997, fell to a 26-month low in Sep of 50.8, at the border of contraction, relative to 51.3 in Aug (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8568). The flash Germany services and manufacturing indexes were at 26 and 24 months lows and the manufacturing output index was the highest in two months. The headline Markit Composite PMI^® has declined for eight consecutive months, the second longest such period of decline after the period May 2008 to Feb 2009. Tim Moore, Senior Economist at Markit, finds the economy close to standstill with growth of both manufacturing and services approximating stagnation. Third-quarter output growth was the weakest in the more than two years of recovery. The outlook is deteriorating with weaker growth trend for new orders than for output. 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	Jul month SA ∆%: 4.0 12 months NSA: 6.3 Blog 09/11/11
Machine Orders	Jul month ∆%: -2.8 Jul 12 months ∆%: 5.5 Blog 09/11/11
Retail Sales	Jul Month ∆% 0.0 12 Months ∆% minus 1.6 Blog 09/04/11
Employment Report	Employment Accounts: 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:

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

There is an interruption in the survey of employment accounts of Germany with monthly growth of 0.0 percent in Aug after growth since Feb of 0.1 percent per month, as shown in Table 48. The 12 months rate of growth fell slightly to 1.3 percent.

Table 48, Germany, People Employed, whose Place of Residence is in Germany, Employment Accounts

	# Employed NSA Millions	∆% 12 months	# Employed SA Millions	∆% Month/ Prior Month
Aug 2011	41.082	1.3	4.109	0.0
Jul	41.024	1.4	41.099	0.1
Jun	41.025	1.4	41.064	0.1
May	40.974	1.4	41.016	0.1
Apr	40.876	1.4	40.977	0.1
Mar	40.691	1.5	40.925	0.1
Feb	40.548	1.5	40.865	0.1
Jan	40.521	1.4	40.820	0.2
Dec 2010	40.891	1.1	40.745	0.1
Dec 2009	40.447	-0.2	40.301	0.0
Jan 2009	40.111	-1.0	40.403	0.1

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

Source: Statistisches Bundesamt Deutschland http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/09/PE11__361__132,templateId=renderPrint.psml

World economic slowdown is not affecting the labor market in Germany, as shown by Table 49. The number of unemployed fell 0.8 percent in Aug 2011 relative to Jul 2011 and fell 9.7 percent relative to a year earlier. The number of employed rose 0.9 percent from Jul to Aug 2011 and rose 1.7 percent relative to a year earlier.

Table 49, Germany, Unemployment Labor Force Survey

	Aug 2011	Jul 2011	Aug 2010
NSA
Number Unemployed Millions	2.50 ∆% Jul 2011: -0.8 ∆% Aug 2010: –9.7	2.52	2.77
% Rate Unemployed	5.9	6.0	6.6
Persons in Employment	39.70 ∆% Jul 2011: 0.9 ∆% Aug 2010: 1.7	39.36	39.03
Employment Rate	63.0 ∆% Jul 2011 0.8 ∆Aug 2010 1.8	62.5	61.9
SA
Number Unemployed Millions	2.51 ∆% Jul 2011: –1.2 ∆% Aug 2010: –12.8	2.54	2.88
% Rate Unemployed	6.0	6.0	6.9
Persons in Employment	39.65 ∆% Jul 2011: 0.2 ∆% Aug 2010: 2.3	39.57	38.74

NSA: not seasonally adjusted; SA: seasonally adjusted

Source: Statistisches Bundesamt Deutschland http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/09/PE11__361__132,templateId=renderPrint.psml

VF France. The Markit France Services PMI^® with Composite PMI^® finds dynamism in services that compensated for the first decline of manufacturing output in 26 month. The result is a composite output index of 53.7 that is slightly higher than 53.2 in Jul (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8533). The Markit Flash France PMI^® registered weakness in all components: composite output falling to 50.7 for a marginal rate of expansion that is the weakest in 26 months; services activity falling to 52.5 in Sep from 56.8 in Aug for the lowest reading in 25 months; manufacturing falling to faster contraction at 47.3 for the lowest reading in 27 months; and manufacturing output falling to faster contraction at 46.6 in Sep, which is the lowest in 28 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8565). Jack Kennedy, Senior Economist at Markit, finds commentary that indicates decline in confidence because of the crisis in the eurozone with adverse effects throughout the economy in weaker demand and economic activity. 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	Jul Exports ∆%: month 0.3, 12 months 2.4 Jul Imports ∆%: month 2.9, 12 months 8.6 Blog 09/11/11
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: 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

GDP growth in France in IIQ2011 relative to IQ2010 stagnated with zero growth, as shown in Table 50. Quarterly growth rates have not been very high since IIQ2009.

Table 50, France, Quarterly Real GDP Growth ∆%

	IQ	IIQ	IIIQ	IVQ
2011	0.9	0.0
2010	0.2	0.5	0.4	0.3
2009	-1.5	0.1	0.2	0.6
2008	0.4	-0.7	-0.3	-1.5
2007	0.6	0.5	0.4	0.1
2006	0.6	1.1	0.2	0.8

Source: Institut National de la Statistique et des Études Économiques http://www.bdm.insee.fr/bdm2/choixTheme.action?code=1#arbo:montrerbranches=theme1/theme9/theme10/groupe1310

Growth rates of France’s real GDP in a quarter relative to the same quarter a year earlier are shown in Table 51. France has not recovered the rates of growth prior to the global recession in excess of 2 percent. GDP fell 3.9 percent in IQ2009, 3.2 percent in IIQ2009 and 2.7 percent in IIIQ2009.

Table 51, France, Real GDP Growth Current Quarter Relative to Same Quarter Year Earlier ∆%

	IQ	IIQ	IIIQ	IVQ
2011	2.1	1.6
2010	1.1	1.5	1.6	1.4
2009	-3.9	-3.2	-2.7	-0.6
2008	1.5	0.3	-0.5	-2.1
2007	2.7	2.1	2.6	2.7
2006	2.3	3.0	2.6	2.7
2005	2.0	1.8	1.9	1.8
2004	1.9	2.7	2.3	2.4

Source: Institut National de la Statistique et des Études Économiques http://www.bdm.insee.fr/bdm2/choixTheme.action?code=1#arbo:montrerbranches=theme1/theme9/theme10/groupe1310

Percentage changes and contributions of segments of GDP in France are provided in Table 52. Internal demand contributed minus 0.3 percentage points to GDP in IIQ2011 and net foreign trade contributed 0.3 percentage points.

Table 52, France, Contributions to GDP Growth, Calendar and Seasonally Adjusted, %

∆% from Prior Period	IQ2011	IIQ2011	2010	2011
GDP	0.9	0.0	1.4	1.5
Imports	3.2	-0.9	8.3	5.1
Family Consump.	0.4	-0.7	1.3	0.5
Govt. Consump.	0.4	0.1	1.2	0.7
GFCF	1.2	0.6	-1.4	2.7
Exports	1.7	0.0	9.3	3.9
% Point Contribs.
Internal Demand	0.5	-0.3	0.8	1.0
Inventory Changes	0.8	0.0	0.5	0.9
Net Foreign Trade	-0.5	0.3	0.1	-0.4

Notes: Consump.: Consumption; Gvt.: Government; GFCF: Gross Fixed Capital Formation

Source: Institut National de la Statistique et des Études Économiques http://www.insee.fr/fr/themes/info-rapide.asp?id=28&date=20110928

Chart 24 of France’s Institut National de la Statistique et des Études Économiques provides the percentage point contributions to GDP growth. GDP grew sharply into IQ2011 and then stalled in IIQ2011. Final consumption was the key negative contributor to GDP growth.

Chart 24, France, Percentage Point Contributions to GDP Growth

Source: Institut National de la Statistique et des Études Économiques http://www.insee.fr/fr/themes/info-rapide.asp?id=28&date=20110928

France’s household expenditures in consumption goods are shown in Table 53. Consumption of manufactured goods has oscillated but with weakness. Consumption of manufactured goods rose 0.1 percent in Aug 2011 relative to Jul 2011.

Table 53, France, Household Expenditures in Consumption Goods, Month ∆%

	Total	Food	Eng. Goods	Energy	Mfg Goods
Aug 2011	0.2	0.1	-0.5	2.6	0.1
Jul	-0.2	-0.4	-0.2	0.2	-0.3
Jun	0.9	-0.4	1.7	1.6	1.0
May	-0.1	-1.4	-1.1	5.6	-1.1
Apr	-1.7	1.4	-2.8	-5.5	-1.1
Mar	-0.9	-0.9	-1.0	-0.5	-0.9
Feb	0.4	0.4	0.7	-0.2	0.6
Jan	-0.4	0.1	-0.1	-2.2	-0.1
Dec 2010	0.2	0.3	0.3	0.0	0.0

Source: http://www.insee.fr/en/themes/info-rapide.asp?id=19&date=20110930

France’s household expenditures of manufactured goods rose only 0.4 percent in the 12 months ending in Aug 2011, as shown in Table 54 Internal demand in advanced economies is generally weak.

Table 54, France, Household Expenditures in Consumption Goods, 12 Month ∆%

	Total	Food	Eng. Goods	Energy	Mfg Goods
Aug 2011	0.3	-0.1	0.2	1.1	0.4
Dec 2010	0.8	1.5	0.3	0.6	0.7
Dec 2009	2.2	-0.1	5.9	-2.7	2.8
Dec 2008	-2.2	-0.2	-5.1	1.8	-2.9
Dec 2007	4.1	1.3	6.4	3.7	4.3
Dec 2006	1.6	0.5	4.9	-5.5	2.5
Dec 2005	1.5	0.0	3.3	0.2	1.2
Dec 2004	2.9	1.6	5.1	-0.3	3.2
Dec 2003	2.5	-1.0	3.2	8.9	1.8
Dec 2002	0.3	-0.1	3.3	-7.5	1.0
Dec 2001	3.1	1.8	2.0	9.6	2.4

Source: http://www.insee.fr/en/themes/info-rapide.asp?id=19&date=20110930

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

Table IT provides the country data table for Italy.

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: 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

Italy’s index of consumer confidence continues to deteriorate below the historical level of 100 in 1980, as shown in Table 55. The index has fallen from 106.4 in May to 98.5 in Sep.

Table 55, Italy, Index of Consumer Confidence 1980=100

	Sep	Aug	Jul	Jun	May
Con-fidence	98.5	100.3	103.6	105.7	106.4
Economy	67.8	70.0	74.8	78.1	77.5
Personal	114.4	116.2	118.8	120.1	121.5
Current	109.7	112.1	115.8	114.6	116.2
Future	87.2	87.5	87.8	93.6	93.0

Source: http://www.istat.it/it/archivio/39970

Italy’s labor report in Table 56 shows some marginal improvement. The rate of unemployment fell slightly from 8.0 percent in Jul to 7.9 percent in Aug. The employment ratio fell also slightly to 57.0 percent in Aug.

Table 56, Italy, Labor Report

	Participation Rate %	Employment Ratio %	Unemploy -ment Rate %
Aug	62.0	57.0	7.9
Jul	62.0	56.9	8.0
Jun	62.0	56.9	8.0
May	62.0	57.0	8.0
Apr	61.8	56.9	7.9
Mar	62.2	57.1	8.1
Feb	61.9	56.8	8.1
Jan	62.0	56.8	8.1
Dec 2010	62.1	56.9	8.2
Dec 2009	62.3	57.0	8.3
Dec 2008	62.6	58.2	6.9
Dec 2007	63.2	59.0	6.7
Dec 2006	62.5	58.5	6.2
Dec 2005	62.6	57.8	7.5
Dec 2004	62.5	57.5	7.9

Source: http://www.istat.it/it/archivio/40711

Chart 25 of the Istituto Nazionale di Statistica of Italy shows the decline of the rate of unemployment of Italy since 2010.

Chart 25, Italy, Unemployment Rate

Source: Istituto Nazionale di Statistica http://www.istat.it/en/

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

Table UK, UK Economic Indicators


CPI	Aug month ∆%: 0.6 Aug 12 months ∆%: 4.5 Blog 09/18/11
Output/Input Prices	Output Prices: Aug 12 months NSA ∆%: 6.1; excluding food, petroleum ∆%: 3.6 Input Prices: Aug 12 months NSA ∆%: 16.2 Excluding ∆%: 13.0 Blog 09/011/11
GDP Growth	IIQ2011 prior quarter ∆% 02; year earlier same quarter ∆%: 0.7 Blog 08/28/11
Industrial Production	Jul 2011/Jul 2010 NSA ∆%: Industrial Production -0.7; Manufacturing 1.9 Jul/Jun 2011 ∆%: Industrial Production -0.2 Manufacturing 0.1 Blog 09/11/11
Retail Sales	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

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 57 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 57 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 12.3 percent by Fri Sep 30, 2011. Dollar devaluation is a major vehicle of monetary policy in reducing the output gap that is implemented in the probably erroneous belief that devaluation will not accelerate inflation and cause, misallocating resources toward less productive economic activities and disrupting financial markets. The last row of Table 57 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 57, Volatility of Assets

DJIA	10/08/02-10/01/07	10/01/07-3/4/09	3/4/09- 4/6/10
∆%	87.8	-51.2	60.3
NYSE Financial	1/15/04- 6/13/07	6/13/07- 3/4/09	3/4/09- 4/16/07
∆%	42.3	-75.9	121.1
Shanghai Composite	6/10/05- 10/15/07	10/15/07- 10/30/08	10/30/08- 7/30/09
∆%	444.2	-70.8	85.3
STOXX EUROPE 50	3/10/03- 7/25/07	7/25/07- 3/9/09	3/9/09- 4/21/10
∆%	93.5	-57.9	64.3
UBS Com.	1/23/02- 7/1/08	7/1/08- 2/23/09	2/23/09- 1/6/10
∆%	165.5	-56.4	41.4
10-Year Treasury	6/10/03	6/12/07	12/31/08	4/5/10
%	3.112	5.297	2.247	3.986
USD/EUR	6/26/03	7/14/08	6/07/10	09/30 /2011
Rate	1.1423	1.5914	1.192	1.339
CNY/USD	01/03 2000	07/21 2005	7/15 2008	09/30 2011
Rate	8.2798	8.2765	6.8211	6.3822
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 58 extracts four rows of Table 57 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 60 below, the dollar has devalued again to USD 1.339/EUR or by 12.3 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 6.388/USD on Fri Sep 23, 2011, or by an additional 6.4 percent, for cumulative revaluation of 22.9 percent.

Table 58, Dollar/Euro (USD/EUR) Exchange Rate and Chinese Yuan/Dollar (CNY/USD) Exchange Rate

USD/EUR	6/26/03	7/14/08	6/07/10	09/30 /2011
Rate	1.1423	1.5914	1.192	1.339
CNY/USD	01/03 2000	07/21 2005	7/15 2008	09/30 2011
Rate	8.2798	8.2765	6.8211	6.3822

Source: Table 57

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 59. 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 59, 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 57 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 60, which is updated for every comment of this blog, shows the deep contraction of valuations of risk financial assets after the Apr 2010 sovereign risk issues in the fourth column “∆% to Trough.” There was sharp recovery after around Jul 2010 in the last column “∆% Trough to 09/30/11,” 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 09/30/11” are in the range from 1.3 percent for the Dow Global and 13.1 percent for the DJ UBS Commodity Index. The carry trade from zero interest rates to leveraged positions in risk financial assets has proved strongest for commodity exposures. Before the current round of risk aversion, all assets in the column “∆% Trough to 09/30/11” 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 5.9 percent below the trough on Jul 2, 2010; the NYSE Financial Index is 11.7 percent below the trough on Jul 2, 2010; Germany’s DAX index is 82.9 percent below; and Japan’s Nikkei Average is 1.4 percent below the trough on Aug 31, 2010 and 23.6 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 8700.29 on Fri Sep 30, which is 15.2 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. The dollar depreciated by 13.3 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 09/30/2011” shows a mix of gains and losses for risk financial assets in Table 60. The realization that there were no more remedies of monetary policy for the global economic slowdown caused flight away from exposures in risk financial assets. 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 60 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 9/30/11” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Sep 30, 2011. Most financial risk assets had gained not only relative to the trough as shown in column “∆% Trough to 9/30/11” but also relative to the peak in column “∆% Peak to 9/30/11.” There are now no indexes above the peak, not even the DJ UBS Commodity Index that is 3.3 percent below the peak. There are several indexes well below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 28.7 percent, Nikkei Average by 23.6 percent, Shanghai Composite by 25.4 percent, STOXX 50 by 20.4 percent and Dow Global by 17.3 percent. S&P 500 is lower relative to the peak by 7.1 percent, DJ Asia Pacific is lower by 10.9 percent and the DJIA is lower by 2.6 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 60, Stock Indexes, Commodities, Dollar and 10-Year Treasury

	Peak	Trough	∆% to Trough	∆% Peak to 9/ 30/11	∆% Week 9/ 30/11	∆% Trough to 9/ 30/11
DJIA	4/26/ 10	7/2/10	-13.6	-2.6	1.3	12.7
S&P 500	4/23/ 10	7/20/ 10	-16.0	-7.1	-0.4	10.6
NYSE Finance	4/15/ 10	7/2/10	-20.3	-28.7	-1.4	-10.5
Dow Global	4/15/ 10	7/2/10	-18.4	-17.3	-1.5	1.3
Asia Pacific	4/15/ 10	7/2/10	-12.5	-10.9	0.9	1.8
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-23.6	1.6	-1.4
China Shang.	4/15/ 10	7/02 /10	-24.7	-25.4	-3.0	-0.9
STOXX 50	4/15/10	7/2/10	-15.3	-20.4	5.3	-5.9
DAX	4/26/ 10	5/25/ 10	-10.5	-13.1	5.9	-2.9
Dollar Euro	11/25 2009	6/7 2010	21.2	11.5	0.8	-12.3
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	-3.3	-2.0	13.1
10-Year Tre.	4/5/ 10	4/6/10	3.986	1.912

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 61 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 61 for Sep 30 shows that the S&P 500 is now 6.7 percent below the Apr 26, 2010 level and the DJIA is 2.6 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 61, 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

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

Table 62, 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 62 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 11.8 percent to ZAR 8.092/USD on Apr 30, which is still 30.1 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 3.1 percent stronger at SGD 1.297/USD on Sep 30 relative to the trough of depreciation but still stronger by 15.9 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 relative to the trough to BRL 1.879/USD on Sep 30 but still stronger by 22.7 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 62 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 62, Exchange Rates

	Peak	Trough	∆% P/T	Sep 30, 2011	∆T Sep 30 2011	∆P Sep 30 2011
EUR USD	7/15 2008	6/7 2010		9/30 2011
Rate	1.59	1.192		1.339
∆%			-33.4		10.9	-18.7
JPY USD	8/18 2008	9/15 2010		9/30 2011
Rate	110.19	83.07		77.04
∆%			24.6		7.3	30.1
CHF USD	11/21 2008	12/8 2009		9/30 2011
Rate	1.225	1.025		0.908
∆%			16.3		11.4	25.9
USD GBP	7/15 2008	1/2/ 2009		9/30 2011
Rate	2.006	1.388		1.558
∆%			-44.5		10.9	-28.7
USD AUD	7/15 2008	10/27 2008		9/30 2011
Rate	1.0215	1.6639		0.966
∆%			-62.9		37.8	-1.3
ZAR USD	10/22 2008	8/15 2010		9/30 2011
Rate	11.578	7.238		8.092
∆%			37.5		-11.8	30.1
SGD USD	3/3 2009	8/9 2010		9/30 2011
Rate	1.553	1.348		1.306
∆%			13.2		3.1	15.9
HKD USD	8/15 2008	12/14 2009		9/30 2011
Rate	7.813	7.752		7.785
∆%			0.8		-0.4	0.4
BRL USD	12/5 2008	4/30 2010		9/30 2011
Rate	2.43	1.737		1.879
∆%			28.5		-8.2	22.7
CZK USD	2/13 2009	8/6 2010		9/30 2011
Rate	22.19	18.693		18.339
∆%			15.7		1.6	17.1
SEK USD	3/4 2009	8/9 2010		9/30 2011
Rate	9.313	7.108		6.871
∆%			23.7		3.3	26.2
CNY USD	7/20 2005	7/15 2008		9/30 2011
Rate	8.2765	6.8211		6.3822
∆%			17.6		6.4	22.9

Symbols: USD: US dollar; EUR: euro; JPY: Japanese yen; CHF: Swiss franc; GBP: UK pound; AUD: Australian dollar; ZAR: South African rand; SGD: Singapore dollar; HKD: Hong Kong dollar; BRL: Brazil real; CZK: Czech koruna; SEK: Swedish krona; CNY: Chinese yuan; P: peak; T: trough

Note: percentages calculated with currencies expressed in units of domestic currency per dollar; negative sign means devaluation and no sign appreciation

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

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

Table 63, 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 63. The highest yield in the decade was 5.510 percent on May 1, 2001 that would result in a loss of principal of 22.9 percent relative to the price on Nov 4. The Fed has created a “duration trap” of bond prices. Duration is the percentage change in bond price resulting from a percentage change in yield or what economists call the yield elasticity of bond price. Duration is higher the lower the bond coupon and yield, all other things constant. This means that the price loss in a yield rise from low coupons and yields is much higher than with high coupons and yields. Intuitively, the higher coupon payments offset part of the price loss. Prices/yields of Treasury securities were affected by the combination of Fed purchases for its program of quantitative easing and also by the flight to dollar-denominated assets because of geopolitical risks in the Middle East, subsequently by the tragic earthquake and tsunami in Japan and now again by the sovereign risk doubts in Europe and the growth recession in the US and the world. The yield of 1.912 percent at the close of market on Fr Sep 30, 2011 would be equivalent to price of 106.4602 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 5.1 percent relative to the price on Nov 4, 2010, one day after the decision on the second program of quantitative easing. If inflation accelerates, yields of Treasury securities may rise sharply. Yields are not observed without special yield-lowering effects such as the flight into dollars caused by the events in the Middle East, continuing purchases of Treasury securities by the Fed, the tragic earthquake and tsunami affecting Japan, 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 63 are expectations of rising inflation and US government debt estimated to exceed 70 percent of GDP in 2012 (http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html), rising from 40.8 percent of GDP in 2008, 53.5 percent in 2009 (Table 2 in http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html) and 69 percent in 2011. On Sep 28, 2011, the line “Reserve Bank credit” in the Fed balance sheet stood at $2834 billion, or $2.8 trillion, with portfolio of long-term securities of $2615 billion, or $2.6 trillion, consisting of $1569 billion Treasury nominal notes and bonds, $67 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 $1606 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 63, 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

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 15,240 thousand barrels per day on average in the four weeks ending on Sep 23 from 15,306 thousand barrels per day in the four weeks ending on Sep 16, as shown in Table 64. The rate of capacity utilization in refineries continues at a high level of 88.0 percent. Imports of crude oil rose from 8,731 thousand barrels per day on average to 8,755 thousand barrels per day. Decreasing utilization with increasing imports resulted in increase of commercial crude oil stocks by 2.0 million barrels from 339.0 million barrels on Sep 16 to 341.0 million on Sep 23. Gasoline stocks rose 0.8 million barrels and stocks of fuel oil rose 0.8 million barrels. Supply of gasoline fell from 9,128 thousand barrels per day on Sep 24, 2010, to 8,907 thousand barrels per day on Sep 23, 2011, or by 2.4 percent, while fuel oil supply fell 1.0 percent. Part of the fall in consumption of gasoline is due to higher prices and part to the growth recession. Table 64 also shows increase in the world price of crude oil by 44.4 percent from Sep 24, 2010 to Sep 23, 2011. Gasoline prices rose 30.3 percent from Sep 27, 2010 to Sep 26, 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 64, US, Energy Information Administration Weekly Petroleum Status Report

Four Weeks Ending Thousand Barrels/Day	09/23/11	09/16/11	09/24/10
Crude Oil Refineries Input	15,240	15,306	14,908
Refinery Capacity Utilization %	88.0	88.3	87.3
Motor Gasoline Production	9,218	9,295	9,212
Distillate Fuel Oil Production	4,518	4,555	4,316
Crude Oil Imports	8,755	8,731	9,027
Motor Gasoline Supplied	8,907 ∆% 2011/2010= –-2.4%	8,973	9,128
Distillate Fuel Oil Supplied	3,801 ∆% 2011/2010 = -1.0%	3,868	3,841
	09/23/11	09/16/11	09/24/10
Crude Oil Stocks Million B	341.0 ∆= 2.0 MB	339.0	357.9
Motor Gasoline Million B	214.9 ∆= 0.8 MB	214.1	222.6
Distillate Fuel Oil Million B	157.7 ∆= 0.1 MB	157.6	173.6
World Crude Oil Price $/B	108.48 ∆% 2011/2010 44.4	109.89	75.14
	09/26/11	09/19/11	09/27/10
Regular Motor Gasoline $/G	3.509 ∆% 2011/2010 30.3	3.601	2.694

B: barrels; G: gallon

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

Chart 26 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 26, US, Weekly Crude Oil Ending Stocks

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

Chart 27 of the US Energy Information Administration shows the price of WTI crude oil since the 1980s. Chart 27 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 27, Crude Oil Cushing, OK, Contract 1

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

Initial claims for unemployment insurance are shown in Table 65. Seasonally adjusted claims fell 37,000 from 428,000 in the week of Sep 17 to 391,000 on Sep 24. Not seasonally adjusted claims fell 28,880 from 353,820 in the week of Sep 17 to 324,940 in the week of Sep 24. The revisions next week, if any, should help to understand better these data.

Table 65, US, Initial Claims for Unemployment Insurance

2011	SA	NSA	4-week MA SA
Sep 24	391,000	324,940	417,000
Sep 17	428,000	353,820	422,500
Change	-37,000	-28,880	-5,250
Sep 10	432,000	328,868	420,500
Prior Year	450,000	372,551	454,500

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

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

Table 66 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 66, US, Unemployment Insurance Weekly Claims

	Not Seasonally Adjusted Claims	Seasonally Adjusted Claims
Sep 23, 2000	227,219	288,000
Sep 22, 2001	353,611	453,000
Sep 21, 2002	317,264	401,000
Sep 27, 2003	304,968	387,000
Sep 25, 2004	282,729	351,000
Sep 24, 2005	292,435	359,000
Sep 23, 2006	261,396	319,000
Sep 22, 2007	247,643	302,000
Sep 27, 2008	392,121	483,000
Sep 26, 2009	449,620	548,000
Sep 25, 2010	372,551	450,000
Sep 17, 2011	350,176	423,000

Source: http://workforcesecurity.doleta.gov/unemploy/finance.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 67 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 0.00 percent for three months or zero, 0.03 percent for six months, 0.05 percent for 12 months, 0.25 percent for two years, 0.40 percent for three years, 0.95 percent for five years, 1.43 percent for seven years, 1.91 percent for ten years and 2.89 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 67. 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 67, 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. 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 this week 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. (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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Pelaez, Carlos M. and Carlos A. Pelaez. 2007. The Global Recession Risk. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

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

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

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

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

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

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Appendix I. The Great Inflation

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

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

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

Chart I1, Brazil, Phillips Circuit 1963-1987

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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US Growth Standstill at 0.8 Percent Annual Rate, Stagnant Personal Income and Consumption and World Financial Turbulence

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